CRITICISM OF THE HELLER PROPOSAL

Proponents of other Federal tax-sharing plans have voiced the following criticisms to Dr. Heller's proposal. Some feel that a greater degree of fiscal equalization should be provided than just allocating the funds on the basis of population. The trust fund device has been criticized as being inflexible and would prevent Congress from annually reviewing and giving proper surveillance to such a program. It is also felt that it lacks provision for gradually increasing the percentage of revenues which might be returned to the States over a period of time. Other believe that more Federal controls should be exercised over the distribution of these shared revenues and that more incentive should be included in such a plan for the reform of State and local governments. As Representative Henry S. Reuss has expressed it: "It encourages State and local governments to languish in archaic. inefficiency rather than to demonstrate their initiative and thus could result in pouring Federal money down a rathole." Finally, local authorities feel that it is weak since it makes no provision for distribution of the funds below the State level.

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REPUBLICAN PARTY POSITION ON FEDERAL TAX SHARING

While the Democratic administration is not at this time supporting this proposal, the Republican Party has made it one of its key issues and many of its spokesmen indicate that they intend to press vigorously for some form of Federal tax-sharing legisliation during the 90th Congress.

The Republican Party, in submitting its own state of the Union message last year and this year, has recommended a system of Federal tax sharing with State and local governments without Federal controls.

The Ripon Society-a group of liberal and moderate Republicans from universities, business, and professions-has strongly supported this proposal.

A. THE REPUBLICAN COORDINATING COMMITTEE PROPOSAL

In the spring of 1966, the Republican coordinating committee submitted its own proposal that the Federal Government share some percentage of personal and corporation income tax collections with the States. In its report, Financing the Future of Federalism: The Case for Revenue Sharing, the committee recommended that this amount might start at 2 percent during the first year and gradually increase to 10 percent after the eighth year. As spelled out by this committee, under its plan, "one-half of each State's share would be computed on the basis of returning income tax collections to the State in which they originated. The other half of each State's share would be computed in a way which will provide some measure of fiscal equilization." The committee further advocated that this equalizing formula be based upon population and per capita income, but that these equalization grants be given only to those States and local units which are contributing an adequate amount of their tax revenues to meet the costs of

Reuss, Hon. Henry S. Prometheus Unbound and Unbankrupt: the State and Local Government Modernization Act of 1967. Washington, D.C., Nov. 25, 1966.

7 Republican Coordinating Committee. Financing the Future of Federalism: The Case for Revenue Sharing. Task Force on the Functions of Federal, State and Local Government. Washington, D.C., March 1966.

their own services. It has also urged that (other than prohibiting use of these funds for promotion of racial discrimination) a minimum of Federal controls be exercised over the States' expenditure of these block grants.

Republican Members of Congress in increasing numbers are stressing the urgency for enactment of Federal tax-sharing legislation with a minimum of Federal controls.

B. THE LAIRD PROPOSAL

Representative Melvin R. Laird, of Wisconsin, chairman of the House Republican Conference, has criticized the grant-in-aid approach as a "second best method of attacking the problems in our society at the Federal level" and proposes tax sharing as the "Great Republican alternative to the Great Planned Society." He is hopeful that legislation will be enacted which will not supplement but which will eventually supplant many of the existing categorical grant-in-aid programs. As far back as 1958, he introduced Federal tax-sharing legislation. Early in the 89th Congress he introduced H.R. 1562 which would return 5 percent of Federal income tax collections to the States from which they were derived with no strings attached. He plans to reintroduce similar legislation in the 90th Congress. He proposes a formula which will equalize the disparity in incomes among the various States. The only Federal standards he would impose would be constitutional ones such as prohibiting use of the money for the promotion of racial discrimination.

C. THE GOODELL PROPOSAL

Representative Charles E. Goodell, of New York, chairman of the Republican Planning and Research Committee of the House of Representatives, has recently proposed that 3 percent (and gradually increasing to 5 percent) of Federal individual income tax revenues be returned to the States. Of the total amount available for distribution to the States, 90 percent would be allocated to the States on a population basis, weighted by an index of tax effort. The remaining 10 percent would be distributed among the 17 States having the lowest per capita personal income. In allotting these funds to an individual State, 50 percent would be available for purposes determined by the State; 45 percent would be turned over to local governments for use as they saw fit; and 5 percent would be available for State executive staff and management improvement purposes. Thus, his proposal seeks not only to make additional Federal assistance available to State governments but also assures local political units that they will receive a significant share of the total State allotment."

DEMOCRATIC ADVOCATES OF FEDERAL TAX SHARING: THE REUSS PROPOSAL

Among the Democratic supporters of Federal tax-sharing legislation is Representative Henry S. Reuss of Wisconsin who is planning to introduce a bill early in the 90th Congress providing for the distri

Laird, Hon. Melvin R. Tax-Sharing With the States: A Way Out. Keynote address given before the National Conference of State Legislative Leaders, The Shoreham Hotel, Washington, D.C., Nov. 17, 1966.

Goodell, Hon. Charles E. A Proposal for General Aid to State and Local Governments Through Sharing of Federal Taxes. Press Release, Nov. 27, 1966.

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bution of block grants amounting to $5 million annually over a 5-year period to those States which have approved plans for modernizing and revitalizing their State and local governments. These funds would be apportioned on the basis of population with no more than 20 percent of the total amount available as supplements for the poorer States.10 Thus, Congressman Reuss is seeking not only to give more Federal financial assistance to State and local governments but is also attempting to give these political units additional incentive to modernize their governmental structures which he considers too antiquated and inefficient.

STATE AND LOCAL ADVOCATES OF FEDERAL SHARING

State and local officials understandably are strongly urging enactment of a Federal tax-sharing plan as a means of helping to ease their financial burdens. The National Governors' Conference has unanimously endorsed such a proposal, and many mayors and other local officials are advocating prompt action on this matter.

FEDERAL TAX-SHARING LEGISLATION INTRODUCED DURING THE 89TH CONGRESS

During the 89th Congress growing interest in this issue was evidenced by the introduction of many tax-sharing bills providing financial assistance to State and local governments. In all, it was found that at least 57 Members of Congress sponsored or cosponsored 51 such bills. Nearly four out of five of these sponsors were Republican Members (45 Republicans as compared with 12 Democrats).

The appendix to this report briefly summarizes each measure which was introduced during the 89th Congress on this subject.

By far the greater number of these bills make provision for Federal tax sharing of a certain percentage of tax collections (primarily income receipts) with the States from which derived. The percentage ranges from one-fourth of 1 percent to 10 percent of the amount of taxes collected.

Some of the bills use taxable income rather than actual tax collection data in determining the amount to be set aside for distribution to the States. S. 2619 introduced by Senator Jacob Javits, Republican, of New York, and others, and nine identical bills introduced in the House of Representatives by Representative Ogden Reid, Republican, of New York, and others more closely resemble Dr. Walter Heller's revenue-sharing proposal." They would establish a trust fund into

10 Reuss. Op. cit.

11 Early in the 90th Cong. Senator Javits and Senators Baker, Carlson, Cooper, Dominick. Scott, and Young of North Dakota introduced a modified version of S. 2619. This new bill S. 482-would appropriate to a revenue sharing fund in the U.S. Treasury a percentage of aggregate taxable income reported on individual income tax returns beginning with 1 percent in fiscal year 1968, 1% percent in fiscal year 1969 and 2 percent in fiscal year 1970 and thereafter. Eighty-five percent of this fund would be available for distribution to the 50 States and the District of Columbia on the basis of population and the State's revenue effort ratio. The remaining 15 percent would be allotted to those States which have a per capita personal income which is lower than the national average. These funds are to be available for use by the States for health, education, and welfare purposes. In addition, no more than 5 percent of the total amount allotted to any State may be used for "planning, research, and development in the fields of modernization of the institutions of State government and the improvement of governmental procedures" (sec. 4(a)). Provision is also made in this bill for submission to and approval by the Secretary of the Treasury of a plan by the State governors outlining how the funds will be used and how they will be allocated among local governments. Senator Javits estimates that, based on current data, $3 billion would be available for distribution to the States during the first year his bill becomes effective.

which would be deposited 1 percent of aggregate taxable income for distribution to the States for health, education, and welfare purposes. Eighty percent of the total would be distributed on the basis of lation plus tax effort of the individual States, and the remaining 20 percent would be allocated to the 13 States with the lowest per capita

income.

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H.R. 6470 introduced by Representative John Dowdy, Democrat, of Texas, would direct the District Directors of Internal Revenue to retain in State depositories an amount equal to 2 percent of the aggregate income tax liability less credits of all individuals residing in the individual States for use by the States for public education purposes only.

While some of the bills introduced did make definite provision for allocation of the funds to local as well as to the State governments, quite a number of them gave the States full determination in the distribution of the funds within their boundaries. One bill, H.R. 10828, sponsored by Representative Abraham Multer, Democrat, of New York, did provide for payments to be made directly to local rather than to State governments. His bill would rebate one-fourth of 1 percent of total Federal income taxes to the local governments from which derived.

Of the 51 tax-sharing bills identified, 32 provided Federal assistance for educational purposes only; 10 bills would allocate the funds for health, education, and welfare purposes; and one bill, H.R. 12730, would make the money available for law-enforcement purposes. The remaining bills made no specific provision on how the funds were to be used.

Quite a few of the bills limited the Federal controls which could be exercised over State expenditure of these block grants, and contained the wording that the funds were to be used by the States "without any Federal direction, control or interference."

Not included in these 51 bills are two other measures which offer alternative means of providing financial assistance to State and local governments other than by returning a specified percentage of Federal tax receipts. H.R. 17998 introduced by Representative Donald Fraser, Democrat, of Minnesota, would appropriate to a fund in the U.S. Treasury an amount equal to a percentage of State and local tax revenues (ranging from 6 percent in fiscal year 1968 to 25 percent in fiscal year 1978 and thereafter). Payments were authorized to be made on the basis of population to those States which have had a State plan approved for distribution of its share among taxing jurisdictions within its boundaries.

Another bill, H.R. 16269, sponsored by Representative John Culver, Democrat, of Iowa, would provide Federal financial assistance to State and local governments from fiscal year 1968 through 1978 and thereafter in an amount equal to a specified percentage ranging from onehalf of 1 percent to 2 percent of the gross national product. Distribution of this fund would also be on the basis of population and would be made to those States which had plans approved for allocation of their share among their local taxing jurisdictions.

Other than having been referred to the appropriate congressional committee for consideration, no action was found to have been taken on any of these measures. Undoubtedly, many of them will be reintroduced during the 90th Congress.

PRO AND CON ARGUMENTS ON FEDERAL TAX SHARING

Some of the basic arguments for and against the proposal that the Federal Government share some portion of its tax revenues with State and local governments with little or no strings attached are summarized below.

A. ARGUMENTS IN FAVOR OF FEDERAL TAX SHARING

The primary argument for Federal tax sharing with State and local governments is the contention that the Federal Government has preempted the major revenue-producing source of income-the income tax. As a consequence, State and local governments have found it necessary to rely primarily on property and sales taxes to finance their programs. While income-tax revenues expand rapidly in response to an overall upsurge in economic activity, receipts from property and sales taxes remain relatively stable and are inadequate to meet the soaring costs of State and local governments. Therefore, it is argued, the Federal Government has an undue advantage over other governmental units, and during an era of economic prosperity it will collect more than it needs to finance its own programs. Hence, part of this excess in collections should be turned back to hard-pressed State and local governments.

When Federal tax sharing began receiving more widespread attention in 1964, it was contended that, in an expanding economy and under existing tax rates, Federal revenues are increasing on the average by about $6 billion per year. Some economists were fearful that once the conflict in South Vietnam is concluded and the level of Federal spending is reduced, additional tax revenues generated by a booming economy would siphon off too much money from the private sector of the economy. A Federal surplus would result before full employment of manpower and resources is achieved. Such a surplus has the effect of retarding economic growth, and in time, the forces of recession set in. It is believed that enactment of this tax-sharing proposal will avert this "fiscal drag" which such budget surpluses may exert upon our national economy.

It is true that appropriate tax reduction measures will also counteract the restrictive effects on the economy that a budget surplus produces. However, tax reduction bills may take too long to enact, and a recession may be well on its way before such legislation can take effect. By making excess revenues automatically available to State and local governments, action gets under way immediately to offset the contractive effect of such surpluses when they do arise.

To the argument advanced that the Federal Government cannot at this time afford such a proposal, some Republican advocates assert that these block grants can evenutally replace categorical grants-in-aid. Hence, adoption of such a plan will not, in the long run, place any additional financial strain upon the Federal purse.

It is argued that the largest areas of unmet national need today lie in the services provided by State and local governments. Latest available statistics on Federal, State, and local finances reveal that State and local government expenditures are climbing at a substantially