Revenue sharing is a type of fiscal federalism whereby the federal government allocates revenue to state and local governments with little or no strings attached. Unlike categorical grants that are program specific, revenue sharing provides flexibility to subnational political jurisdictions in using federal funds tailored to their special needs.
There are two kinds of revenue sharing. General Revenue Sharing (GRS) pertains to funding with no particular designation. State and local governments can use this money for a variety of purposes including highway improvements, police and fire protection, health services, library books, and constructing or renovating public buildings. Special Revenue Sharing (SRS) earmarks funds under broad headings such as law enforcement, transportation, and community development.
The American political system operates on the principle of limited government; if problems arise, they are best addressed by governments closest to the people. Until the Great Depression beginning in 1929, the federal government had limited involvement in economic and social welfare issues. President Franklin Roosevelt’s New Deal programs to pull the country out of the Depression significantly enlarged the federal government’s role in domestic issues, because the problems they addressed were national in scope, for example, employment; housing; economic security for senior citizens, widows, and the disabled; and business/labor practices.
Following World War II, most New Deal programs had become entrenched in federal government domestic policy. In addition, new programs were enacted such as the G.I. Bill of Rights, which allocated millions of dollars for veterans’ postsecondary education. By 1962, federal categorical grants numbered 160, and they jumped to 379 by 1967, much of the increase resulting from the civil rights revolution and President Lyndon Johnson’s War on Poverty. By the end of the 1960's, the increases in domestic spending, as well as rising costs of the Vietnam War, severely strained the budget. At the same time, a critical mass of politicians and policy analysts raised questions about the proper role of the federal government in social and economic welfare policy. Critics argued that the national government was gaining too much power in policy making at the expense of state and local governments.
BIRTH OF REVENUE SHARING
In 1964, a Presidential Task Force on Revenue Sharing, appointed by President Johnson, proposed a plan calling for distribution of federal funds to the states with few conditions. The money, called a “fiscal dividend” of a growing economy, would direct a percentage of annual federal revenues to the states. No action was taken on this proposal, but during the Johnson era, two pieces of legislation, the Partnership for Health Act of 1966 and the Safe Streets Act of 1968, contained elements of Special Revenue Sharing, as states were given some leeway in designating federal funds in the areas of health and law enforcement.
Richard Nixon’s election to the presidency in 1968 signaled a reassessment of federal fiscal policy. While the Vietnam War spending levels remained constant, the myriad of federal domestic programs came under greater scrutiny. The Nixon approach, known as “New Federalism,” called for a reexamination of the powers and responsibilities of national, state, and local governments. The president believed that the centralization of power created under the New Deal and War on Poverty programs undermined that of state and local governments. His New Federalism would restore to subnational governments their proper role in the federal system, shift power away from Washington, and provide much-needed funding for states and cities to solve their problems.
In 1971, Nixon submitted to Congress a proposal requesting $5 billion in GRS, and $11 billion for SRS that would consolidate 105 categorical programs into six broad headings—job training, education, transportation, law enforcement, urban development, and rural development. Members of Congress raised numerous objections to both proposals: (1) the government was running a deficit and had no money to share, (2) Congress would lose control over spending, (3) money needed for large cities with serious social and economic problems would be diverted to smaller cities and towns, and (4) categorical grants already worked well because the money was targeted to specific projects. On the other hand, state officials and big city mayors supported the revenue sharing proposals, especially GRS. By the late 1960's, states were strapped for money, and the resources of big cities were dwindling because of white flight to the suburbs, poverty in minority communities, and the relocation of many industries to the South.
It was not until 1972 that Congress passed and the president signed into law the State and Local Fiscal Assistance Act, known as GRS. The states received one-third of the money, and local governments two-thirds. About 39,000 general purpose political jurisdictions were allocated funds according to a complex formula based on population, tax effort, income tax collection, and need. No action was taken on SRS; however, the Comprehensive Employment Training Act and the Community Development Block Grant Act, enacted in 1974, contained features of SRS, known as block grants.
GRS was reauthorized in 1976, 1980, and 1983. During President Jimmy Carter’s administration, in 1980, GRS was reauthorized, but only for local jurisdictions. President Ronald Reagan (1981–89) further cut revenue sharing, as his philosophy of governance called for tax cuts, major slashes in federal spending, and the dismantling of social programs. While GRS was at the heart of Nixon’s New Federalism, Reagan urged that it be eliminated because the government had little business at any level interfering with the private sector and free markets. But when GRS came up for reauthorization in 1983, strong lobbying by local government officials pressured Congress and the president to renew the program for three more years. By 1986, large federal deficits necessitated additional cuts in federal programs, and as a result, GRS was eliminated.
TABLE 8. General Revenue Sharing Budget Outlays in Billions of Dollars, Fiscal Years 1972–86
Retroactive to January 1, 1972.*
Funding discontinued for states.**
Source: Congressional Quarterly Almanac, vol. 1972–86.
GRS never became a major source for federal funding of domestic programs. By the late 1970s, categorical grants comprised 73 percent, block grants 15 percent, and GRS 12 percent of domestic spending; moreover, categorical programs continued to grow at the same time, reaching 534 by 1980. Budgets for GRS maintained fairly consistent levels through the 1970's, but decreased during the Reagan years.
GRS never achieved the status envisioned by President Nixon, but the program enabled states and local communities to address some of their pressing needs. Smaller political jurisdictions used the money for capital projects like courthouses and libraries, and for police and fire protection. Big cities used their funding to meet operating expenses, a risky use, given the fact that GRS was not a permanent appropriation. Some of the funding was allocated to social services such as legal aid, job training, and housing assistance. While it existed, GRS enjoyed great popularity because state and local governments could decide how and where to spend the funds. Also, public officials and citizens liked the idea that some of their federal taxes were being returned to their state and local governments with no strings attached.
Congressional Quarterly Almanac, vol. 1972–86 (Washington, DC: Congressional Quarterly Services, 1972–86), Timothy Conlon, New Federalism: Intergovernmental Reform from Nixon to Reagan (Washington, DC: Brookings Institution, 1988); Charles Richardson, The State of State Local Revenue Sharing (Washington, DC: Advisory Commission on Intergovernmental Relations, 1980); David Walker, The Rebirth of Federalism (Chatham, NJ: Chatham House Publishers, 1999); and Bruce Wallin, From Revenue Sharing to Deficit Sharing (Washington, DC: Georgetown University Press, 1998).
Last Updated: 2006
SEE ALSO: Block Grants; Community Development Block Grants; Education; Fiscal Federalism; Grants-in-Aid; Housing; Johnson, Lyndon B.; Intergovernmental Lobbying; Local Government; New Deal; New Federalism; Reagan, Ronald; Transportation Policy; Welfare Policy