Demise of federal revenue sharing seems assured

Federal largest to state and local governments, which might have been used to buoy them in a recession, is drying up. Budget cutters in Congress are snipping away jobs programs, educational assistance, and a variety of new or discretionary social aid programs from the 1981 budget. But the biggest loss to states and cities will be an almost certain cut of $1.7 billion in general revenue sharing.

For the Democrat-controlled Congress and presidency, the goal of a balanced budget has been an opportunity to move against a program they have not been fond of from the start: the eight-year-old system of returning federal tax revenue, with no strings attached, to states, cities, and counties.

The $1.7 billion cut represents the 50 states' share of the $6.8 billion program; the remainder goes to 39,000 localities, and is used to supplement everything from the city's police payroll to the street repair bill. Both President Carter, who inherited revenue sharing from the Nixon-Ford administration, and the Senate Budget Committee are supporting the cut.

Last year, before the budget-balancing rush, Congress almost succeeded in cutting the entire $2.3 billion states' share. President Carter, however, at that time announced he was committed to preserving it.

Because many states pass their share directly along to the cities, the entire government lobby is concerned with the issue. This includes the US Conference of Mayors, the National League of Cities, the National Governors' Association, the National Conference of State Legislatures, the Council of State Governments, and the National Association of Counties. These groups consistently rank revenue sharing as the most important development in their relations with the federal government in the last 20 years.

The tug of war, then, gets to the very heart of the US federal system, the sharing of power among the central and the state governments. Revenue sharing was part of President Nixon's program of "decentralization." Its demise would be a victory for "centralists."

"Revenue sharing gave state and local officials some degree of judgment over how to spend," says Randy Arndt of the League of Cities. "But if the federal government is going to demand certain things of state and local governments -- like environmental standards or handicapped access standards -- and not share the money to do so, then a confrontation is ahead. State and local governments don't want to be simply "junior feds."

But centralists say they believe revenue sharing is simply a sinkhole through which hard-to-collect federal tax dollars are dropped, with no control from Washington over how they are spent. Centralists point out that states and cities have their own ways of raising money through income, sales, and property taxes. And federal money that is sent back to the states and cities goes to practically every locality, not just to those in need of it, centralists complain.

Federal money being funneled into state coffers also may be responsible for the budget surpluses that a number of states have experienced over the past decade.Congress has been irked that the states have led the charge for a balanced federal budget while they are benefiting from federal revenue sharing.

Although a Republican president was responsible for signing it into law (after congressional modification), two liberal Democratic economists actually brought forth the idea of revenue sharing. Walter Heller, former chairman of the Council of Economic Advisers, proposed revenue sharing in 1957 in an article in the Canadian Tax Journal. The idea was adopted by a task force on intergovernmental relations created by President Johnson and chaired by Joseph Pechman. Revenue sharing, known as the Heller-Pechman plan, was rejected by Mr. Johnson but became part of President Nixon's "new federalism" approach.

Mr. Heller, who describes himself as a "liberal decentralist," told the Monitor in a phone interview that he "really regrets this cut" being advocated by the President and congressional leaders.

"The philosophy behind general revenue sharing was to give the states federal support and then let them exercise their own good judgment," Mr. Heller said. "The money is being put to good use, I believe. And the fact that some states are running budget surpluses is transitory, I think. With the economy in decline, those surpluses could quickly dry up."

Mr. Heller says he finds it ironic that the state's portion of revenue sharing is being axed when the original concept was for the states to be the sole recipients. He says he does not believe the cut will "bring any state to its knees," but it may cause a state to tighten up its own aid in areas such as higher education.

"I'm not one of those who says there shouldn't be any budget cuts," Mr. Heller said. "I think there could be cuts in the categorical aid areas. But I personally think this is the wrong way to go."

A $500 million "transitory aid" program has been advanced by the President to assist those cities that have a tradition of relying on their state government to pass through revenue sharing to them.