Special Message to the Congress Proposing a General Revenue Sharing Program

To the Congress of the United States:

One of the best things about the American Constitution, George Washington suggested shortly after it was written, was that it left so much room for change. For this meant that future generations would have a chance to continue the work which began in Philadelphia.

Future generations took full advantage of that opportunity. For nearly two turbulent centuries, they continually reshaped their government to meet changing public needs. As a result, our political institutions have grown and developed with a changing, growing nation.

Today, the winds of change are blowing more vigorously than ever across our country and the responsiveness of government is being tested once again. Whether our institutions will rise again to this challenge now depends on the readiness of our generation to "think anew and act anew," on our ability to find better ways of governing.

BETTER WAYS OF GOVERNING

Across America today, growing numbers of men and women are fed up with government as usual. For government as usual too often means government which has failed to keep pace with the times.

Government talks more and taxes more, but too often it fails to deliver. It grows bigger and costlier, but our problems only seem to get worse. A gap has opened in this country between the worlds of promise and performance--and the gap is becoming a gulf that separates hope from accomplishment. The result has been a rising frustration in America, and a mounting fear that our institutions will never again be equal to our needs.

We must fight that fear by attacking its causes. We must restore the confidence of the people in the capacities of their government. I believe the way to begin this work is by taking bold measures to strengthen State and local governments-by providing them with new sources of revenue and a new sense of responsibility.

THE POTENTIAL OF STATE AND LOCAL GOVERNMENT

Part of the genius of our American system is that we have not just one unit of government but many, not just one Chief Executive and Congress in Washington, but many chief executives and legislators in statehouses and courthouses and city halls across our land. I know these men and women well. I know that they enter office with high hopes and with sweeping aspirations. I know they have the potential to be full and effective partners in our quest for public progress.

But once they have taken office, leaders at the State and local level often encounter bitter disappointment. For then they discover that while the need for leadership is pressing, and their potential for leadership is great, the power to provide effective leadership is often inadequate to their responsibilities. Their dollars are not sufficient to fulfill either their dreams or their most immediate and pressing needs.

And the situation is getting worse.

A GROWING FISCAL CRISIS

Consider how State and local expenditures have been growing. In the last quarter century, State and local expenses have increased twelve-fold, from a mere $11 billion in 1946 to an estimated $132 billion in 1970. In that same time, our Gross National Product, our personal spending, and even spending by the Federal government have not climbed at even one third that rate.

How have the States and localities met these growing demands? They have not met them. State and local revenues have not kept pace with rising expenditures, and today they are falling even further behind. Some authorities estimate that normal revenue growth will fall $10 billion short of outlays in the next year alone.

THE HEAVY BURDEN OF STATE AND LOCAL TAXES

The failure of State and local revenues to keep pace with demands is the inherent result of the way in which our tax system has developed. Ever since the 16th Amendment in 1913 made it possible for the Federal government to tax personal income, this source of revenue has been largely pre-empted and monopolized by Washington. Nine out of every ten personal income tax dollars are collected at the Federal level.

Income tax revenues are quick to reflect economic growth. Often, in fact, they grow much faster than the economy. As a result, budget increases at the Federal level can more readily be financed out of the "natural growth" in revenues, without raising tax rates and without levying new taxes.

State and local governments are not so fortunate. Nearly three-fourths of their tax revenues come from property and sales taxes, which are slow to reflect economic expansion. It is estimated, in fact, that the natural growth in revenues from these sources lags some 40 to 50 percent behind the growth rate for State and local expenditures. This means that budget expansion at these levels must be financed primarily through new taxes and through frequent increases in existing tax rates.

As a result, the weight of State and local taxes has constantly been getting heavier. On a per capita basis, they have climbed almost 50 percent in the last fourteen years. Property tax receipts are six times as great as they were a quarter century ago. In the past dozen years alone, States have been forced to institute new taxes or raise old ones on 450 separate occasions. Consumer and service taxes have sprung up in bewildering variety in many cities.

These rising State and local leges are becoming an almost intolerable burden to many of our taxpayers. Moreover, they often fall hardest on those least able to pay. Poor and middle income consumers, for example, must pay the same sales taxes as the wealthy. The elderly--who often own their own homes--must pay the same property taxes as younger people who are earning a regular income. As further pressures are placed on State and local taxes, the impact is felt in every part of our society. The hard-pressed taxpayer--quite understandably---',s calling for relief.

The result is a bitter dilemma for State and local leaders. On the one hand, they must cut services or raise taxes to avoid bankruptcy. On the other hand, the problems they face and the public they serve demand expanded programs and lower costs. Competition between taxing jurisdictions for industry and for residents adds further pressure to keep services up and taxes down.

While political pressures push State and local leaders in one direction, financial pressures drive them in another. The result has been a rapid and demoralizing turnover in State and local officeholders. The voters keep searching for men and women who will make more effective leaders. What the State and localities really need are the resources to make leaders more effective.

THE BEST OF BOTH WORLDS

The growing fiscal crisis in our States and communities is the result in large measure of a fiscal mismatch; needs grow fastest at one level while revenues grow fastest at another. This fiscal mismatch is accompanied, in turn, by an "efficiency mismatch"; taxes are collected most efficiently by the highly centralized Federal tax system while public funds are often spent most efficiently when decisions are made by State and local authorities.

What is needed, then, is a program under which we can enjoy the best of both worlds, a program which will apply fast growing Federal revenues to fast growing State and local requirements, a program that will combine the efficiencies of a centralized tax system with the efficiencies of decentralized expenditure. What is needed, in short, is a program for sharing Federal tax revenues with State and local governments.

A WORD ABOUT PRESENT GRANTS-IN-AID

There is a sense in which the Federal Government already shares its revenues with governments at the lower levels. In fact, Federal aid to the States and localities has grown from less than one billion dollars in 1946 to over 30 billion dollars this year. Unfortunately, most of this assistance comes in the form of highly restricted programs of categorical grants-in-aid. These programs have not provided an effective answer to State and local problems; to the contrary, they provide strong additional evidence that a new program of unrestricted aid is badly needed.

The major difficulty is that States and localities are not free to spend these funds on their own needs as they see them. The money is spent instead for the things Washington wants and in the way Washington orders. Because the categories for which the money is given are often extremely narrow, it is difficult to adjust spending to local requirements. And because these categories are extremely resistant to change, large sums are often spent on outdated projects. Pressing needs often go unmet, therefore, while countless dollars are wasted on low priority expenditures.

This system of categorical grants has grown up over the years in a piecemeal fashion, with little concern for how each new program would fit in with existing old ones. The result has been a great deal of overlap and very little coordination. A dozen or more manpower programs, for example, may exist side by side in the same urban neighborhood--each one separately funded and separately managed.

All of these problems are compounded by the frequent requirement that Federal dollars must be matched by State and local money. This requirement often has a major distorting effect on State and local budgets. It guarantees that many Federal errors will be reproduced at the State and local level. And it leaves hard pressed governments at the lower levels with even less money to finance their own priorities.

The administrative burdens associated with Federal grants can also be prohibitive. The application process alone can involve volumes of paperwork and delays of many months. There are so many of these programs that they have to be listed in large catalogs and there are so many catalogs that a special catalog of catalogs had to be published. The guidelines which are attached to these grants are so complicated that the government has had to issue special guidelines on how the guidelines should be interpreted. The result of all this has been described by the Advisory Commission on Intergovernmental Relations as "managerial apoplexy" on the State and local level.

Meanwhile, the individual human being, that single person who ultimately is what government is all about, has gotten lost in the shuffle.

State and local governments need Federal help, but what they need most is not more help of the sort they have often been receiving. They need more money to spend, but they also need greater freedom in spending it.

A NEW APPROACH

In the dark days just after the Battle of Britain, Winston Churchill said to the American people: "Give us the tools and we will finish the job."

I now propose that we give our States and our cities, our towns and our counties the tools--so that they can get on with the job.

I propose that the Federal Government make a $16 billion investment in State and local government through two far-reaching revenue sharing programs: a $5 billion program of General Revenue Sharing which I am describing in detail in this message to the Congress, and an $11 billion program of Special Revenue Sharing grants which will be spelled out in a series of subsequent messages.

GENERAL REVENUE SHARING: HOW IT WORKS

The General Revenue Sharing program I offer is similar in many respects to the program I sent to the Congress almost eighteen months ago. But there are also some major differences.

For one thing, this year's program is much bigger. Expenditures during the first full year of operation would be ten times larger than under the old plan. Secondly, a greater proportion--roughly half---of the shared funds would go to local governments under the new proposal. In addition, the 1971 legislation contains a new feature designed to encourage States and localities to work out their own tailor-made formulas for distributing revenues at the State and local level.

The specific details of this program have been worked out in close consultation with city, county and State officials from all parts of the country and in discussions with members of the Congress. Its major provisions are as follows:

1. Determining the Size of the Overall Program.

The Congress would provide a permanent appropriation for General Revenue Sharing. The size of this appropriation each year would be a designated percentage of the nation's taxable personal income--the base on which individual Federal income taxes are levied. This arrangement would relieve the States and localities of the uncertainty which comes when a new level of support must be debated every year.

Since the fund would grow in a steady and predictable manner with our growing tax base, this arrangement would make it easier for State and local governments to plan intelligently for the future.

The specific appropriation level I am recommending is 1.3 percent of taxable personal income; this would mean a General Revenue Sharing program of approximately $5 billion during the first full year of operation, a sum which would rise automatically to almost $10 billion by 1980. All of this would be "new" money-taken from the increases in our revenues which result from a growing economy. It would not require new taxes nor would it be transferred from existing programs.

2. Dividing Total Revenues Among the States.

Two factors would be used in determining how much money should go to each State: the size of its population and the degree to which it has already mobilized its own tax resources. By using a distribution formula which takes their tax effort into account, this program would encourage the States to bear a fair share of responsibility. A State which makes a stronger effort to meet its own needs would receive more help from the Federal Government.

One other incentive has also been built into the new legislation: those States which negotiate with their local governments a mutually acceptable formula for passing money on to the local level, would receive more money than those States that rely on the Federal formula. This provision would encourage a State and its localities to work out a distribution plan which fits their particular requirements. States which develop such plans would receive a full 100 percent of the money allocated to them under the formula described above. Other States would receive only 90 percent of their allocation, with the remaining ten percent being carried over and added to the following year's overall allocation.

3. Distributing Revenues Within the States.

Those States which do not adopt their own plan for subdividing shared revenues would follow a formula prescribed in the Federal legislation. This formula would assign to the State government and to all units of local government combined a share of the new money equal to. that portion of State and local revenues currently raised at each level. On the average, this "pass through" requirement would mean that about one-half of the revenue sharing funds would go to the States and half would go to the localities. Governmental units of all sizes would be eligible for aid-but only if they were set up for general purposes. This would exclude special purpose units such as sewer districts, school districts, and transit authorities. Each general purpose unit would then receive its proportionate share of revenues based on how much money it raises locally.

4. Other Procedures and Requirements.

General Revenue Sharing monies would come without program or project restrictions. The funds would be paid out at least quarterly through the Treasury Department; no massive new Federal agencies would be established. Each State would be required to pass on to local units their proper share of the Federal funds and to observe appropriate reporting and accounting procedures.

In my State of the Union message I emphasized that these revenue-sharing proposals would "include the safeguards against discrimination that accompany all other Federal funds allocated to the States." The legislation I am recommending provides these safeguards. It stipulates that: "No person in the United States shall on the ground of race, color or national origin be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any program or activity funded in whole or in part with general revenue sharing funds."

The Secretary of the Treasury would be empowered to enforce this provision. If he found a violation and was unable to gain voluntary compliance, he could then call on the Attorney General to seek appropriate relief in the Federal Courts, or he could institute administrative proceedings under Title VI of the Civil Rights Act of 1964--leading to a cut off of Federal funds. The Federal Government has a well defined moral and constitutional obligation to ensure fairness for every citizen whenever Federal tax dollars are spent. Under this legislation, the Federal Government would continue to meet that responsibility.

ENHANCING ACCOUNTABILITY

Ironically, the central advantage of revenue sharing--the fact that it combines the advantages of Federal taxation with the advantages of State and local decision making--is the very point at which the plan is frequently criticized. When one level of government spends money that is raised at another level, it has been argued, it will spend that money less responsibly; when those who appropriate tax revenues are no longer the same people who levy the taxes, they will no longer be as sensitive to taxpayer pressures. The best way to hold government accountable to the people, some suggest, is to be certain that taxing authority and spending authority coincide.

If we look at the practice of government in modem America, however, we find that this is simply not the case. In fact, giving States and localities the power to spend certain Federal tax monies will increase the influence of each citizen on how those monies are used. It will make government more responsive to taxpayer pressures. It will enhance accountability.

In the first place, there is no reason to think that the local taxpayer will be less motivated to exert pressure concerning the way shared revenues are spent. For one thing, the local taxpayer is usually a Federal taxpayer as well; he would know that it was his tax money that was being spent.

Even if local taxpayers were only concerned about local taxes, however, they would still have a direct stake in the spending of Federal revenues. For the way Federal money is used determines how much local money is needed. Each wise expenditure of Federal dollars would mean an equivalent release of local money for other purposes--including relief from the need to raise high local taxes even higher. And every wasted Federal dollar would represent a wasted opportunity for easing the pressure on local revenues.

Most voters seldom trace precisely which programs are supported by which levies. What they do ask is that each level of government use all its money--wherever it comes from--as wisely as possible.

The average taxpayer, then, will be no less disposed to hold public officials to account under revenue sharing. What is more, he will be able to hold them to account far more effectively.

The reason for this is that "accountability" really depends, in the end, on accessibility--on how easily a given official can be held responsible for his spending decisions. The crucial question is not where the money comes from but whether the official who spends it can be made to answer to those who are affected by the choices he makes. Can they get their views through to him? Is the prospect of their future support a significant incentive for him? Can they remove him from office if they are unhappy with his performance?

These questions are far more likely to receive an affirmative answer in a smaller jurisdiction than in a larger one.

For one thing, as the number of issues is limited, each issue becomes more important. Transportation policy, for example, is a crucial matter for millions of Americans--yet a national election is unlikely to turn on that issue when the great questions of war and peace are at stake.

In addition, each constituent has a greater influence on policy as the number of constituents declines. An angry group of commuters, for example, will have far less impact in a Senatorial or Congressional election than in an election for alderman or county executive. And it is also true that the alderman or county executive will often be able to change the local policy in question far more easily than a single Congressman or Senator can change policy at the Federal level.

Consider what happens with most Federal programs today. The Congress levies taxes and authorizes expenditures, but the crucial operating decisions are often made by anonymous bureaucrats who are directly accountable neither to elected officials nor to the public at large. When programs prove unresponsive to public needs, the fact that the same level of government both raises and spends the revenues is little comfort.

At the local level, however, the situation is often reversed. City' councils, school boards and other local authorities are constantly spending revenues which are raised by State governments--in this sense, revenue sharing has been with us for some time. But the separation of taxing and spending authority does not diminish the ability of local voters to hold local officials responsible for their stewardship of all public funds.

In short, revenue sharing will not shield State and local officials from taxpayer pressures. It will work in just the opposite direction. Under revenue sharing, it will be harder for State and local officials to excuse their errors by pointing to empty treasuries or to pass the buck by blaming Federal bureaucrats for misdirected spending. Only leaders who have the responsibility to decide and the means to implement their decisions can really be held accountable when they fail.

OTHER ADVANTAGES

The nation will realize a number of additional advantages if revenue sharing is put into effect. The need for heavier property and sees taxes will be reduced. New job opportunities will be created at the State and local level. Competition between domestic programs and defense needs will be reduced as the State and local share of domestic spending increases. As the States and localities are renewed and revitalized, we can expect that even more energy and talent will be attracted into government at this level. The best way to develop greater responsibility at the State and local level is to give greater responsibility to State and local government.

In the final analysis, the purpose of General Revenue Sharing is to set our States and localities free---free to set new priorities, free to meet unmet needs, free to make their own mistakes, yes, but also free to score splendid successes which otherwise would never be realized.

For State and local officials bring many unique strengths to the challenges of public leadership. Because they live day in and day out with the results of their decisions, they can often measure costs and benefits with greater sensitivity and weigh them against one another with greater precision. Because they are closer to the people they serve, State and local officials will often have a fuller sense of appreciation of local perspectives and values. Moreover, officials at these lower levels are often more likely to remember what Washington too often forgets: that the purpose of government is not budgets and programs and guidelines, but people.

This reform will also help produce better government at the Federal level.

There is too much to be done in America today for the Federal Government to try to do it all. When we divide up decision-making, then each decision can be made at the place where it has the best chance of being decided in the best way. When we give more people the power to decide, then each decision will receive greater time and attention. This also means that Federal officials will have a greater opportunity to focus on those matters which ought to be handled at the Federal level.

LABORATORIES FOR MODERN GOVERNMENT

Strengthening the States and localities will make our system more diversified and more flexible. Once again these units will be able to serve--as they so often did in the 19th century and during the Progressive Era--as laboratories for modern government. Here ideas can be tested more easily than they can on a national scale. Here the results can be assessed, the failures repaired, the successes proven and publicized. Revitalized State and local governments will be able to tap a variety of energies and express a variety of values. Learning from one another and even competing with one another, they will help us develop better ways of governing.

The ability of every individual to feel a sense of participation in government will also increase as State and local power increases. As more decisions are made at the scene of the action, more of our citizens can have a piece of the action. As we multiply the centers of effective power in this country, we will also multiply the opportunity for every individual to make his own mark on the events of his time.

Finally, let us remember this central point: the purpose of revenue sharing is not to prevent action but rather to promote action. It is not a means of fighting power but a means of focusing power. Our ultimate goal must always be to locate power at that place--public or private-Federal or local--where it can be used most responsibly and most responsively, with the greatest efficiency and with the greatest effectiveness.

"THE CARDINAL QUESTION"

Throughout our history, at one critical turning point after another, the question on which the nation's future turned was the relationship between the States and the central government. Woodrow Wilson properly described it as "the cardinal question of our constitutional system."

In most cases--in the 1780's and in the 1860's and in the 1930'S, for example-that question was resolved in favor of a stronger government at the Federal level. But as President Wilson went on to say, this question is one which "cannot . . . be settled by the opinion of any one generation, because it is a question of growth, and every successive stage of our political and economic development gives it a new aspect, makes it a new question."

Because America has now reached another new stage of development, we are asking that "cardinal question" again in the 1970's. As in the past, this is a matter beyond party and beyond faction. It is a matter that summons all of us to join together in a common quest, considering not our separate interests but our shared concerns and values.

To a remarkable degree, Americans are answering Wilson's cardinal question in our time by calling on the Federal Government to invest a portion of its tax revenues in stronger State and local governments. A true national consensus is emerging in support of revenue sharing. Most other nations with Federal systems already have it. Most Mayors and Governors have endorsed it. So have the campaign platforms of both major political parties. This is a truly bi-partisan effort.

Revenue sharing is an idea whose time has clearly come. It provides this Congress with an opportunity to be recorded as one that met its moment, and answered the call of history. So let us join together, and, by putting this idea into action, help revitalize our Federal system and renew our nation.

RICHARD NIXON

The White House

February 4, 1971