The Pros and Cons of Revenue Sharing

Although the idea of revenue sharing is not new, the issues involved are still dim to much of the public. TIME Senior Correspondent John Steele provides this analysis of what is at stake in the major new presidential proposal:

IN 1805, President Thomas Jefferson urged "a just repartition" of federal revenues among the states for the promotion of "canals, roads, arts, manufactures, education and other great objects within each state." The idea got nowhere then, and neither did an updated version that Chief Economic Adviser Walter Heller tried to sell to President Lyndon Johnson 159 years later. But now it has resurfaced as the linchpin of President Nixon's new legislative program. Under Nixon's proposed revenue-sharing plan, the Federal Government would yield a small part of its take from individual income taxes to states, cities and counties, which in turn would be free to spend the money as they pleased. If enacted, the plan would constitute the most basic change in public finance since the federal income tax was imposed in 1913.

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That "if" is rather gigantic. Nixon will have to drive the plan through a Congress whose leaders jealously guard their control over the use of federal revenues. On the House Ways and Means Committee, which has life and death power over the plan, both Democratic Chairman Wilbur Mills and the ranking Republican John W. Byrnes of Wisconsin are strongly opposed. "I am not going to be a tax collector for anyone but the Federal Government," says Mills. Byrnes' view: "Maybe I'm oldfashioned, but I believe most sincerely that with the pleasure of spending public funds there should also be the odium of collecting them."

Powerful support is building up for revenue sharing, however, from the kind of fellow politicians that Congressmen listen to: mayors, Governors, state legislators and county officers. They see access to more federal money as their only realistic hope of escaping from a fiscal bind without the local tax increases that have become an invitation to defeat at the polls.

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There is more to it than politics. States and cities everywhere are in a fiscal crisis. New York, Cleveland, Newark and Detroit have had to cut back on services. On a single day last month, three Governors--all Republicans --sounded separate doleful warnings. Nelson Rockefeller reported New York to be in "a bleak fiscal situation," Thomas Meskill said Connecticut is "wallowing in debt," and Linwood Holton predicted for Virginia a $16 million state deficit by mid-1972 and no emergency state aid for hard-pressed local governments.

The root problem is that the tax take of states, cities and counties does not rise as fast as their costs, their populations or their citizens' demands for more and better services. From 1946 to 1968, states and localities multiplied their spending 6 1/2 times, their debt seven times.--but their tax take only 5 1/2 times. One big reason is that the Federal Government hogs so much of the available revenue through the income tax. Although 37 states also have income taxes, Washington receives 90% of all income tax collections.

Because of its progressive rates, the federal income tax is a marvelously efficient collection instrument. According to former Presidential Counsellor Daniel P. Moynihan, "the basic equation of American political economy is that for each 1% increase in the gross national product, the income of the Federal Government increases 1.5%." By contrast, the income from property and sales taxes, the traditional backbone of state and local finance, reacts more sluggishly to economic growth. Furthermore, these taxes are regressive: their burden falls most heavily on lower-income groups.

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States and cities, of course, get money from Washington now--nearly $30 billion a year. But Washington tightly controls what local politicians can do with the existing money; the funds are parceled out among hundreds of grants-in-aid that have specific purposes. Federal aid for road construction, for example, cannot be diverted to mass transit even if a state has many miles of lightly traveled new superhighways and commuter railroads that are falling apart. Moreover, many federal aid programs--welfare, hospital construction, library services--require states, cities and counties to raise matching funds. Nixon's revenue-sharing proposal aims not only at getting desperately needed cash to the states and cities but also at cutting through the red tape of present aid programs. More important, it would return to states and cities the power to set spending priorities for an important chunk of new revenue.

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Among the numerous arguments, pro and con, already being heard on revenue sharing:

> Although no one will put it so bluntly in public, there is considerable disagreement over whether states and cities can be trusted to spend wisely the new money they may get. Mills, Byrnes and many others warn that if Congress hands over billions to the states and cities with no strings attached, it will begin a dangerous dismantling of the control procedures in present programs that are intended to make sure Washington gets the best use out of its aid dollars. Proponents of revenue sharing argue back that Washington has no monopoly on brains. "Those closest to local needs and problems should be--or become--best equipped to deal with them intelligently and flexibly," says Treasury Under Secretary Paul A. Volcker. Moynihan adds: "The Federal Government is good at some things and bad at others. The thing it is perhaps best at is collecting taxes, but it's bad at dispensing services."

> The A.F.L.-C.I.O. opposes revenue sharing because it doubts that state legislatures will spend the transferred funds in ways that will benefit urban workers. Other liberals have shared that fear, but it has faded greatly as reapportionment engendered by the Supreme Court's one-man, one-vote decision has made legislatures increasingly responsive to urban and suburban needs. Further redistricting on the basis of the 1970 census should create more city and suburban seats in legislatures; that would further weaken the chance of an anti-city bias in the spending of shared federal revenues.

> Many lobbying groups, and some liberal Senators, fear that revenue sharing will lead to cutbacks in special-purpose grants. The National Education Association will back revenue sharing only if it is assured that half of the new money will go to support public schools. Governors and mayors, eager as they are for revenue sharing, roar with anger at any thought of cutbacks in existing programs of aid for specific purposes. Volcker and other Administration leaders disclaim any such intention but add that "we are definitely talking about a change in emphasis and direction" of federal help for the future. Nixon, however, will have to calm the fears of cutbacks in special-purpose grants if his revenue-sharing plan is not to die aborning.

>Fiscal conservatives, noting that federal tax collections are already falling behind spending, ask in effect: "Share what revenues?" They fear that revenue sharing will lead only to still bigger federal deficits and higher federal taxes. The Nixon Administration, however, is committed to a particular level of spending in order to help expand the economy--so the question is not how much the Federal Government spends, but where it spends it. "Revenue sharing will not raise the existing federal tax burden," says Assistant Treasury Secretary Murray L. Weidenbaum. "The alternative to revenue sharing is not a smaller federal deficit. The alternative is a higher level of federal spending in some other, lower-priority areas."

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What is at stake here, finally, is a shifting--perhaps profound--in roles and missions of government between Washington and the states and cities. Rather than increasing dependence on Washington, the Nixon plan is designed to strengthen the muscle of statehouses and city halls in dealing with a wide range of problems. As it stands now, never has so much been spent by Washington for so little. By quitclaiming a small percentage of federal tax revenues, Nixon hopes to restore some important sovereignty to the governments closest to the people. But can money alone make local governments effective and honest, and can the major social problems be met without national guidance or at least standards? The issues are serious and complex; the arguments for and against will fuel a congressional debate that will be long, arduous and angry.

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