The Drive to Kill Revenue Sharing

By Ed Magnuson

Budget Director David Stockman said it first when he unveiled the Administration's proposals for radical cuts in domestic spending. Treasury Secretary James Baker picked up the refrain in Senate testimony. But no one has voiced the argument against federal revenue sharing more often or more forcefully than Ronald Reagan. He said it again last week when he met with the National Governors' Association at the White House: "There's simply no justification for the Federal Government, which is running a deficit, to be borrowing money to be spent by state and local governments, some of which are now running surpluses."

As with so many of the President's sweeping pronouncements, his comparison of federal and state finances contained much appeal, some merit and considerable oversimplification. To be sure, the federal red ink is overflowing. The Congressional Budget Office predicted last week that even if the President gets all the spending cuts he wants, which seems highly unlikely, deficits will average about $185 billion a year for the next five years, rather than declining to $144 billion by 1988, as the Administration projects. Meanwhile, the states, all of which except Vermont are forbidden by their own laws or constitutions to operate with deficits, ended their last fiscal years with a total surplus of $6.3 billion. The Administration has used this contrast as its main argument for ending the 13-year-old program of general revenue sharing, under which 39,218 cities and counties last year split a pot of $4.5 billion in unrestricted federal grants. As Baker told the Senate Appropriations Committee, "Stated simply, we have no revenue to share."

The Governors, 34 of whom are Democrats, issued no outcry against the proposed cutoff. "Revenue sharing has got to be on the table with everything else," said Colorado's Richard Lamm, a Democrat, about the concerted need to reduce the national deficit. But the Governors are by no means idle spectators in the fight over the program. They know that if cities lose their customary Washington pipeline, they will turn first to their state capitals to try to close the gap. Many Governors contend that their state surpluses are small relative to their budgets, and that they are required to set aside much of the extra money in "rainy day funds" for emergencies. To give greater help to the cities, the Governors say, they would have to raise taxes. Pennsylvania's Republican Govenor Richard Thornburgh said he was worried the Administration might be considering "some kind of bizarre reverse revenue sharing that would make this supposed pot of state surpluses available for solving the federal deficit."

The states lost their cut of $2.3 billion in revenue-sharing funds in 1981, and many Governors and legislatures began passing tax increases at the time. More hikes followed when the recession further reduced local and state revenues. Democratic Governors, in particular, complain that if Reagan will not take the unpopular steps of raising federal taxes and freezing Social Security benefits, as well as holding down military spending, it is unfair to expect the states to raise money once again to replace the federal funds.

Still, there is a deeper argument over revenue sharing than the matter of whether the President or the Governors currently possess the most political courage. It centers on the question of just which governmental functions should be national, and financed by all taxpayers, and which are primarily local and should be funded locally. Federal grants to states and cities took root in the 1960s largely as Democratic programs aimed at particular problems, including health, nutrition, housing and jobs. Funds were earmarked for very specific purposes, and Washington set standards that had to be met to get the money. Richard Nixon instituted general revenue sharing in 1972; by next October $78.6 billion will have gone out to cities, counties and states. The rationale was mainly to give cities with impoverished property-tax bases a chance to provide local services comparable to more stable communities. Argues New Hampshire's Republican Governor John Sununu: "The whole point of the Federal Government is its being an equalizer. That's its role."

Two things went wrong, according to many specialists in the field. First, most of the money was expected to be used for buildings, sewers and other construction projects. But with no strings attached, cities often simply tucked the money into their general budgets, spending it on such traditionally local functions as police and fire fighters and even golf courses. Says Martin Anderson, a former Reagan adviser and now a fellow at California's Hoover Institution: "Revenue sharing is a pure grant; you don't have to take any responsibilities. That's why local governments love it."

Second, in the political struggle over the funds, nearly every city got a piece. A compromise formula based on population, tax base and per capita income led to a thin, scattershot dispersal of money. The recipients included not only down-at-the-heels municipalities but also gilded places like Palm Springs, Calif., Vail, Colo., and Greenwich, Conn. Critics point out that 25% of grants in 1983 went to cities in the ten wealthiest states.

Defenders of the program contend that this does not mean the principle is flawed but that the distribution formula should be changed. They concede, however, that federal income tax revenues, which once seemed limitless, can no longer provide the surpluses needed to prop up local budgets. At the same time, many cities have broadened their financial bases through sales or income taxes. In 1972, for example, sales taxes accounted for 8.6% of all local revenues; by 1983 they supplied 14.2%. Meanwhile, federal revenue sharing, which contributed 13.7% of all local government income in 1973, dropped to 6.4% in 1983. That leads the Administration to claim that cities really will not miss the dwindling federal funds as much as their officials fear. Contends the Hoover Institution's Anderson: "If a politician can't squeeze 5% or 6% out of a budget without a major tax increase, he shouldn't be in office."

While politicians argue over comparative tax resources, fundamental questions about the appropriate federal role in local services seem unlikely to be resolved. City experts like the Urban Institute's George Peterson argue that the national Government should help out when it adds to local costs by establishing new standards, as it did in 1972 for water-treatment plants. Other urban advocates argue that welfare payments should be a federal responsibility, since many tightfisted communities export their poverty burden to more generous cities. New York City's Deputy Mayor Alair Townsend points out, for example, that about 14% of the homeless women and 8% of men living in the city's shelters are from out of town. Says Townsend: "These people gravitate to New York when things get really tough, knowing they will get a better deal here." Some analysts also place aid to higher education as a federal responsibility on the theory that students are highly mobile after graduation and their acquired knowledge is a national asset. Environmental problems that do not respect city and state lines, such as acid rain, air pollution and water contamination, clearly require federal help.

But when cities use revenue sharing to pay for local garbage collection, street maintenance, fire and police, rather than for capital improvements, health care, nutrition or housing, the program does not seem to be meeting its original purposes. Stanford Political Scientist Alvin Rabushka contends that city services in general have declined despite federal aid. "If we spent more and got worse--if spending increases didn't translate into better services--it's hard to prove that cutbacks will lead to any deterioration," he argues. That view may seem harsh to local officials struggling to keep their cities from sliding deeply into debt, but it was clear last week that revenue sharing, at least in its present form, was in deep political trouble.

With reporting by Hays Gorey/Washington and Richard Woodbury/Los Angeles, with other bureaus