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Statement of
unnorable Farris Bryant
Chairman of the Advisory Commission on
Intergovernmental Relations to the Subcommittee on Fiscal Policy
of the Joint Economic Committee
of the Congress
(Presented by Hm. G. Colman, Executive Director of the Commission)
November 7: 1%?
Madam Chairman and Members of the Committee:
These proceedings of your Committee over the past several weeks
have highlighted the fact that the Federal fiscal outlook changes with
the times. Sometime soon, perhaps, the national government again will
be in a position to consider declaring "fiscal dividends"--as it was
three years ago. But meanwhile, the future of fiscal federalism should
be built on firmer foundations than the quicksand of a fluctuating out-
look for the Federal budget. A broader, more balanced Federal-State-
local approach to fiscal policy is needed, and that is what we will
discuss in the following statement.
Two years ago, the Advisony
fiscal balance in the American federal system with a View to developing
policies for improving intergovernmental fiscal arrangements. The
Commission for some time had been aware that many of the existing grant-
in-aid arrangements were causing severe strains in Federal-State-local
relations.
The Conuussioh devoted two meetings to its comprehensive report
on "Fiscal Balance in the American Federal System." The first meeting
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the Commission has emphasized in this report that the States in
particular must help themselves. Specifically, the Commission
recommended that States make effective use of broadbased sales and
personal income taxes--tvo real workhorscs of the State tax system.
The Commission also noted that many local governments, partiCularly
in the South and Southwest, could make far more productive use of
the property tax.
In urging greater State use of the sales and property tax,
the Cannission took note of their regressive character and recommended
that the States take action designed to shield low income families
from undue sales and property tax burdens. The Commission noted in
its report the pioneering efforts of Indiana and Hisconsin--jurisdic-
tions that have uSud positive and negative tax credits (cash rebates)
to pull the regressive stinger from their sales and property tax
levies.
Strengthen State Administrative Capabilities
The State-local fiscal system was and is only part of the
Commission's concern in its overall study of fiscal federalism.
These governments must also be in a strong administrative position
to make maximum effective use of Federal aid. For this reason the
Commission adopted a series of recanlendations designed to strengthen
the executivu management of State government. Improvements recommended
by the Commission include:
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o-cher elected State executivo officials,
--authority for a Governor to succeed himself,
--provision for a comprehensive executive budget,
--development of a strong State planning capability, and
--authority for Governors to reorganize the executive
branch of State government subject to State legislative
Veto.
The Commission also focused on the need for stronger State
legislatures. stressing the fact that this branch must have the tune
and the tools to deliberate on and decide broad questions of State
policy, including Federal aid programs. In this area, its recommenda-
tions include:
--Removing undue restrictions on the length of sessions and
adoption by more States of annual sessions,
--a salary commensurate with the demands on a legislator's
t imv ,
--professional year-round staffing for major legislative
committees,
--development of machinery in the legislature for following
Federal legislation and presenting legislative views to
Congressional committees.
The Commission made a series of specific recommendations for
improving Federal coordination and management of the categorical aid
programs. and we proposed a broad program for simplification and
strengthening of Federal interagency arrangements.
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Imgroving Fiscal Balance in Metrogolitan Areas
In December 1966 the Advisory Commission on Intergovernmental
Relations stated in its Eighth Annual Ragort that "...the tremendous
task of financing, servicing and governing Hetropolitan America
clearly poses the greatest challenge to federalism since the Civil
Hat." Within the context of the Commission's study of "Fiscal
Balance in the American Federal System" and aided by a grant from
the Department of Housing and Urban Development, the Cmnnission was
able to probe in depth the "fiscal facts of life" in the 37 largest
metropolitan areas and to make case studies in 13 of these areas.
This analysis of the socio-econonic fiscal disparities be-
tween the metropolitan central cities and their surrounding suburban
communities reveals that:
--The central cities, particularly those located in the
industrial Northeast and Midwest. are in the throes
of a deepening fiscal crisis. 0n the one hand, they are
confronted with the need to satisfy rapidly growing ex-
penditure requirements triggered by the rising number of
"high cost" citizens. On the other hand. their tax rescurces
are increasing at a decreasing rate (and in some cases
actually declining), a reflection of the exodus of middle
and high income families and business firms from the
central city to suburbia.
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--The concentration of high cost citizens in the central city
is dramatically underscored by public welfare statistics.
For example, 27 percent of Maryland's population is located
in Baltimore. yet 72 percent of Maryland's AFDC expenditures
is to be found in that city. By the sane token, Boston,
with l4 percent of Massachusetts' population, accounts for
40 percent of that State's AFDC expenditure.
--A clear disparity in tax burden is evident between central
city and outside central city. Local taxes in the central
cities are 7.6 ggrcent of inco-e; outside the central cities
only 6.9 percent of incone.
--0n the educational outlay front, the central cities are
falling farther behind their suburban neighbors with each
passing year. In 1957 the per pupil expenditures in the
37 metropolitan areas favored the central city slightly--
$312 to $303 for the suburban jurisdictions. By 1965. the
suburban jurisdictions had forged far ahead--$S73 to $669
for the central cities. This growing disparity between
the central city and suburban school districts takes on a
more ominous character in light of the fact that the central
city school districts must carry a disproportionately heavy
share of the educational burden-~the task of educating an
increasing number of "high cost" underprivileged children.
Children who need education the most are receiving the least!
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While the Commission's recommendations for reducing disparities
among jurisdictions within metropolitan areas are set forth in
Enclosure 2, I would like to emphasize the importance of our State
and Federal aid recommendationsvparticularly important in view of
our finding that to date at least intergovernmental transfers have
not been notably succcssful in reducing metropolitan fiscal dis-
parities. Specifically, the Commission recommended:
--State school aid formulas should be amended to reflect
higher per pupil costs for disadvantaged children, es-
pecially in densely populated areas; and the Elementary
and Secondary Education Act of 1965 should be amended to
authorize the use of available grant funds in support of
each action.
o-States should authorize the establishment of regional
school property taxing districts to assist in equalizing
the property tax burdens of school financing between
central cities and suburbs.
Summagy
In summary, the Advisory Commission has looked at the question
of fiscal balance in the American federal system. It has found many
manifestations of imbalance:
~a hard-tovmanage categorical aid system at the Federal
level capable of being converted to a more flexible
instrument of national policy,
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--considerable untapped revenue potential in the aggregate
at the State and local level that is politically difficult
but not impossible to tap with appropriate tax policies
and detennined political leadership,
-~severe fiscal pains in some of our central cities relative
to their surrounding suburbs which call for a substantially
greater State involvanent than has heretofore been shown.
In all modesty, let me express the belief that the Commission
has developed a well-rounded program to deal with these manifestations
of imbalance and for strengthening our federal system. It is a
program that deals with administrative and management matters, as
well as questions of money. It is a program appropriate for good times
as well as bad, for now and for the post-Vietnam period.
In conclusion, let me express the Commission's appreciation
for this opportunity to submit our views to yOur Committee. The
Commission's Executive Director and Senior Staff will endeavor to
answer any questions.
Thank you.
Enclosures:
1. Current list of Cannission Members
2. Exact Text of Recommendations Adopted by the Commission
in its Report on Fiscal Balance in the American Federal System
3. Secretary Fowler's Dissent on Recommendation No. l
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in July 1967 focused mainly on the administrative and nanageability
aspects of categorical assistance at the Federal, State, and local
levels. In October 1967, the Comission canpleted consideration of
the report, focusing on topics such as the basic structure of
federalism, and metropolitan fiscal disparities. A current list of
Commission members is appended as Enclosure 1. A complete list of
the 39 recommendations adopted by the Gamaission is appended as
Enclosure 2 to this statement for insertion in the record if you
desire. The completed report is in the processof reproduction, and
printed copies will be available about the end of the year.
The list of recommendations indicates that Secretary of the
Treasury Fowler, Mayor Naftalin, and I dissented in part on the
Commissions major recommendation calling for a broader mix of
Federal aid. Governor Dempsey, Governor Rockefeller, and other
members of the Commission have filed or may file dissents or reserva-
tions about other specific recommendations.
A New "Mix" for Federal Aid
The Federal categorical grant-in-aid, the principal tool of
fiscal federalism over the past 75 years, has had near explosive
growth since 1963, in terms of the nusber of grants, their dollar
magnitudes, and their effects on intergovernmental relationships.
The impact of Federal aid on State and local government over the
past two decades has been felt most acutely by Governors, State
legislative leaders, and budget officers. Hany of them believe
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that the increasing number of grant programs has led to greater
Federal interference in their administrative and policy roles and
that grants of late have tended to be less stimulative and more
coercive in their impact. At the Federal level, there has also
been a growing recognition of problems associated with manageability
and administration of a large number of narrowly defined categorical
aids.
A hard look at the Federal aid system reveals a second major
deficiency: a failure to clearly sort out the basic purposes for
which the National Government should extend aid to State and local
governments. The classic objectives of fiscal aid--egualization,
stimulationI demonstrationI and general support-~are not clearlx
differentiated under the present aid sxstem. In the Commissions
view, it is just as necessary to sort out these basic aid objectives
as to introduce a greater degree of "flexibility" into the aid system.
Consequently, the Commission has recommended a balanced three-fold
approach for constructing a more effective and more sensibly structured
Federal aid system:
--a reformed system of categorical grants-in-aid to stimulate
and support programs in specific areas of national interest
(such as air and water pollution abatement) and to promote
experimentation and demonstration where the national interest
dictates;
--bloc grants, through the consolidation of existing cate-
gories (along the lines of the Partnership in Health Act
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of 1966) to give States and localities greater flexibility
in meeting needs in broad functional areas; and
--general support payments (revenue-sharing on a per capita
basis, adjusted for variations in tax effort) to allow
States and localities to devise their own programs and
set their own priorities to help solve their own unique
and most crucial problems.
The Commission believes that general support payments could
be made directly to major local units of government (cities and
counties) if provision is made for insuring that the purposes for
which they are spent are not in conflict with any existing compre-
hensive State plan.
Categorical aids will undoubtedly continue to serve the nation's
needs well, especially for purposes of stimulation or demonstration,
in those instances where the national interest in areas of traditional
State-local concern are clearly identified. The Comission is
heartened by the Partnership in Health Act of 1966 which was de-
signed to "decongest the categorical arteries" with a functional
bloc grant that allows States and localities necessary latitude to
work out appropriate programs in a field where Federal support is
warranted.
But a new approach, that contemporary American federalism
requires, is one in which there is the widest possible scope for
developing State and local solutions to State and local problems
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in contrast to a solution prescribed by a Federal categorical grant.
Such an approach is typified by the general support grant.
The Commission's recommendations for significant improvements
in the categorical aid program offer a means of working toward this
three-tiered Federal aid approach. The Commission urges Congress
and the Executive Branch to reduce the number of categorical aids
by at least one-half. This can be achieved in a variety of ways and
one, recommended by the Commission, is to have Congress give the
President authority to propose grant consolidation plans subject to
veto by either House of Congress, along lines generally similar to
the Reorganization Act of 1949.
The Commission has recommended as a starter, that Federal aid
categories in the water and sewer field and for vocational education
be consolidated to create two new functional type bloc grants, re-
placing a dozen or so existing grants. It has also urged the
Executive Branch to initiate an aggressive program to simplify and
systematize the varied matching and apportionment formulas for those
existing Federal grant-in-aid programs that do not lend themselves
to easy consolidation.
Let me explain my own dissent with respect to the Commission's
recommendation calling for Federal general support grants to State
and local governments. While I personally look with favor on this
type of Federal assistance, I dissented in order to underscore the
Administration's unwillingness to endorse any type of Federal revenue
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sharing proposition at this time. (As of the October 6 meeting of
the Commission I was still serving as Director of the Office of
Emergency Planning.) The Administration has consistently taken
the position that in light of its current budgetary situation, it
is premature to endorse a proposal calling for a rather substantial
departure from present methods of extending aid to State and local
governments. This position is further elaborated in Secretary
Youler's statement of reservation and partial dissent appended
hereto as Enclosure 3.
The "Pass-Through" Issue
Now, let me underscore the Commission's thinking on the most
controversial aspect of this general support or revenue sharing
proposal-~namely, the manner in which Federal general support funds
should be routed to local governments. The Camaission did not take
the doctrinaire position that all funds would have to be funneled
through the State, nor on the other hand did it advocate a bypass-
the-State policy. The Commission simply took the position that if
Congress decides to distribute general purpose aid directly to local
governments, it should recognize the potential coordinating role of
the State by adding a proviso that local governments could not spend
Federal general support funds on projects or programs in conflict
with any existing comprehensive State plans.
We believe this State planning proviso is meritorious because
its adoption would encourage States to meet their responsibility for
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planning and coordinating the orderly and effective utilization of
the State's physical and human resources. We do not view such a
proviso as an invitation to discriminatory action by any State. It
would not affect the components of any distribution formula laid
down by the Congress. The money "due" the locality under such a
formula could not be diverted to other localities or to the State
itself. However, such funds could not be expended in ways pro-
hibited by the State's development plans.
Strengthening the State-Local Tax System
There is another point that needs clarification in order to
eliminate any notion that the Commission's recent action approving
general support aid to State and local governments constitutes an
haplied repudiation of its earlier proposal for a partial Federal tax
credit for State and local income tax payments.
The Advisory Commission's earlier tax credit recommendation
grew out of a study of FederalState personal income tax coordination.
The Cousission urged the States to make more intensive use of the
personal income tax because of its equity and economic responsiveness.
The Commission found, however, that intensive use of the personal
income tax by the Federal Government particularly since 1940, has
been a principal deterrent to the State income tax movement. Until
Nebraska and Michigan enacted personal income taxes, no truly new
State income taxes had been enacted since 1937. (West Virginia
enacted, repealed, and in 1961 reenacted an income tax.) The
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Commission recommended, therefore, that the Congress counteract this
Federal deterrent by providing an optional tax credit for State income
tax payments.
The reports of both the Cmmaission and the Committee for
Economic Development have been and are significant influences in
the consideration of new and increased State income taxes in a
number of States. In addition to the Nebraska and Michigan enact-
ments, California and Iowa in 1967 took steps to make greater use of
this type of taxation. Moreover, other States including Hashington
and Pennsylvania are now actively considering the personal income tax
as a revenue source for meeting increased demands for State and local
governmental services.
While these State income tax developments may diminish slightly
the validity of the Cmmmission's earlier tax credit proposal, heavy
Federal reliance on this form of taxation unquestionably will continue
to constitute a large constraint on more effective State use of the
personal income tax. In effect the Advisory Cmmmission's tax credit
proposal in 1965 was designed to restore to the States the personal
income tax option--a tax policy alternative that has become less
attractive to State political leadership as Federal use of this tax
has become more intensive. If States are to remain viable, they
should have an opportunity to tap this first-rate revenue source under
political conditions that make it no less attractive than general
retail sales taxes. (Of course, at such a time as all or most States
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are utilizing effectivcly the income tax revenue source, the Com-
mission's tax credit proposal will have lost most of its validity.)
Let us now consider the other elements of our State-local tax
system--factors of prime importance if we are going to construct a
well balanced intergovernmental fiscal system.
While the States and localities have demonstrated a rather
remarkable tax effort in recent years, they still have considerable
untapped revenue potential. Our estimates are that the total potential
existing in the three major tax areas--personal income, general sales,
and property tax--approximates $20 billion annually. If tapped fully,
these potentials would increase State-local tax revenues by 35 percent.
Unfortunately, however, this massive untapped potential is
more apparent than real. Assuming the possible, though unlikelyI
event that the States should tap the full potential of over $20
billion additional annual revenue, would this insure a balance in
our fiscal system? Obviously not. One cannot average the added
potential of some States with the deficits in others when expenditure
needs are measured against available fiscal resources. A surplus in
Scarsdale is of no help to New York City. A full tax effort by South
Carolina and Arkansas up to the level of the "top ten" still does not
give those States the resources necessary to equalize adequately the
costs of education between uell-to-do children and "poverty children."
Nevertheless, because fifteen States still do not levy a per-
sonal income tax and six States have no general retail sales tax,
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8tateinerit of No:lorable Farr.:; lii:,-::ll, CN:. ~ :'re'u of the AJ v ~2: r y 13.ri-r .' ss ion ui: I':--erg -.::r::rie:r-a. IO..stio:s to L::e 30::-co:c:r:ittee cn Fisca.. F,-licy of -.te ..~ -~.::-. E ::.norite Co:r:t i 1.1.cle e y the Co:igrer:. :e:.:,3 : ~: y W1':. G. E a.'a::. E:-;ec':t om i:'. rectrar ci' the Conti:!s 1-:.:.) N. ver.:;er ';~. ~. C/:7 ---.:-1!-0:.512-!:.--:. :"3;.:: I-I-7:.1---:T Of ".';O Cojr:rlitti'e: '' --7.I------Jeedi.cof yoi r Coi!mi--Les car the past several weeks hve his.. ary::ed de ca.:t rhat m: Fedeal fisco_ eatlook changer wie: --he t in-er .-.at"eti.e soon, perhaph Oc mi tional coverry!e.t aga i'l r~.11 : e in a rc--i-,ier tc comii..ier denine:r.g "fisea~. dividerds"-,as it saa :-.ree year : ne:. Ir.:, t:..unswh i ke -.he flmm-e of fisca l federal lisa should .e l'ui~' -. 01. C i :-r::c::-els:sa t i:>rs th-31: le gr.im:seri of a fluctuarir.g cu-.. .-:ok er i::e F-:leral bu del.. A 1,roader, clore balanced Federe Erateoca~: si ---:0:'il to fiscal policy is r-eeded, arrl that is -sh:c, -awii uss i:-. ti-:e fello'zirs stater:lerd., -..c -_:e-tra -'go, the A:iviscry Comissicr: embarked or; si 3; i .ly ol' fiscal bal'.e.:e is. the kl.critan Ee-.~:eral ::yr.tuni w i ti: a view to -levelopi -: cies for ir:1:rs:ni!.ntergovern:r:er.1.al 1 !sr:s I arringeme:-.t-;. T1-e C 311:-imlic. n : e :::-:r.e 1, are N:.: -: m:si' aw-:re that :r.any of the exis-: ii:E crar.-,i.n-al:1 arrari.-.ar:lerd.s were r:2-3::'.n:.; suver, st-lins in -'eaeral-5--ite-l..el elal-ics.:: 3.2 C: -111'.it aien devoted two F.eet ing to 5:r m:':r1: rui.1:: :: ve rep:wt on "?isesl Balan':e tn the felierican -'ederal Gyi;tem." 'ihe first :r.eatin!
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..... C nri. .-...: h.i .a~ ~l. e ... .hi ...r... lw St r~s i ..--.... ..1 I rts 1 [p (ils v s. .p c fi~ ..y,... Co m ss c
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.. .. ..... ..--.'.w. le ed S at x r. ....o f-c~a s --stthors~~ .y .o .G.ero .o .u e h .m.e ., -.v s n .. r ..otrhe v .x c t v .... ..,
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ra. .y.em ....d... gan f ... ...b.. .ee rpe t h oui s o a
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--The concentr:ttion of high cost citizens in the central city is dramatically underscored by public welfare statistics. For example, 27 percent of Maryland's population is loc;ited i.n Baltimore. yet 72 percent of Maryland's AFDC expenditures is to be found in that city. By the same token, Boston, with 14 percent of Massachtisetts' population, accounts for 40 percent ei that State's AFDC expenditure. --A clear disparity in tax burden is evident betweeri central city and outside cent ral city. 1,ocal taxes in the central cities are 7,6 percent of inceine; outside the central cities only 4.9 pert .'nt of inermite --On the educational outlay Eront, the central] cities are falling farther behind their suburban neighbors with each passing year. In 1957 the per pupil expenditures in the H metropolitan areas favored the central city slightly-$312 to $303 for the suburbrin jurisdictions. By 1965, the suburb:In turisdict ions had forged far ahead--S573 to S449 for the central cities. This growing disparity between the central etty and suburban school districts take-t on a more ominous character in light of the fact that the central city school districts must carry a disproportionately h.'avy share of the educational burden--the task of educating :In increasing number of "high cost" underprivileged children. Children who need educati.on the mesL are receiving the least
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..ttln ..-......oltr rasa e e frlii
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able ~ ~ ~ ~ ~ ~ ~ ~ .......r... otnia n h agegt
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Thpuy 96 LpgusPd Pain P on h dadm pipra p pand mappgbl p y .spe ...... ....ia assac a h eerl tt, n oa .ees .n .coe .97 .h C. asso .op e .osdrto ..
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:ral aid system reveals a seco irly sort out the basic purpos should extend aid to State an =erives nF fine;al airl--r-annl ey Ferani ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ .. .....n.r.-.prsntadsyt I heCnisin -d system of categorical grants-in-aid to stimul u L plagraans in speci[ic areas ei national intet .tir ;md wattar pollutiori nhatement) and to pronte itation and deinOnstration Where the natiOnal int
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1966) ~ ~ ~ ~ ~ ~ .. ......Ltsan oaite retrfexblt .....n ...s.n...d....onl res;an
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... .ot.m ..... .ouinpeete yaFeea aeoia rn
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Now, tot me underscore the Commission's thinkir ivt:rstal :sspm i or this general support or revent al--nantely, the manner in which Feder;tl paneral .be routed to local governments. The Cominissio[.ctrinaire position that all funds would have ta ;h t-ne State, nor on the other hand did it advoca are policy. The Connission simply took the posi -ss decidos t-o distribute general purpose aid diz ments, Et should recogts1;:e the potential coordle :ate 1:y addingg :s proviso that loc:al governments e
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plannjng ~ ~ ~ ~ ~ ~ ..... .. oria~a h reryadefcieui.. in. o Lhe ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ...aer .....an ua esucs W ontviwsc ........ .s .niv tto od srm naoya to yaySa would ~ ~ ~ ~ ~ ~ ~ ~ ...... ..attecmoet fay itiuinfrual
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r. ~ ~ ~ ~ ~ ~ ~ ~ ~ ........hth mniso adte cnite o
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are utili.:ing ~ ~ ~ ~ ~ ...f.e.... .h noetxrvnesucteCm mission's ~ ~ ~ ~ ~ ~ ~ .. ..x ...... p.p.a ..lhv o tms fis ai t .... .t ....sd ..h threeenso urSae loo a
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