Special Message to the Congress on Sharing Federal Revenues With the States.

To the Congress of the United States:

If there is a single phenomenon that has marked the recent history of nations, large and small, democratic and dictatorial, it has been rise of the central government.

In the United States, revenues of the Federal government have increased ninety-fold in thirty-six years. The areas of our national life where the Federal government has become a dominant force have multiplied.

The flow of power from the cities and States to Washington accelerated in the Depression years, when economic life in America stagnated, and an energetic national government seemed the sole instrument of national revival. World War II brought another and necessary expansion of the Federal government to marshal the nation's energies to wage war on two sides of the world.

When the war ended, it appeared as though the tide would be reversed. But the onset of the cold war, the needs of a defeated and prostrate Europe, the growing danger and then the reality of conflict in Asia, and later, the great social demands made upon the Federal government by millions of citizens, guaranteed the continued rapid growth and expansion of Federal power.

Today, however, a majority of Americans no longer supports the continued extension of federal services. The momentum for federal expansion has passed its peak; a process of deceleration is setting in.

The cause can be found in the record of the last half decade. In the last five years the Federal government enacted scores of new Federal programs; it added tens of thousands of new employees to the Federal payrolls; it spent tens of billions of dollars in new funds to heal the grave social ills of rural and urban America. No previous half decade had witnessed domestic Federal spending on such a scale. Yet, despite the enormous Federal commitment in new men, new ideas and new dollars from Washington, it was during this very period in our history that the problems of the cities deepened rapidly into crises.

The problems of the cities and the countryside stubbornly resisted the solutions of Washington; and the stature of the Federal government as America's great instrument of social progress has suffered accordingly--all the more so because the Federal government promised so much and delivered so little. This loss of faith in the power and efficacy of the Federal government has had at least one positive impact upon the American people. More and more, they are turning away from the central government to their local and State governments to deal with their local and State problems.

As the Federal government grew in size and power, it became increasingly remote not only from the problems it was supposed to solve, but from the people it was supposed to serve. For more than three decades, whenever a great social change was needed, a new national program was the automatic and inevitable response. Power and responsibility flowed in greater and greater measure from the state capitals to the national capital.

Furthermore, we have hampered the effectiveness of local government by constructing a Federal grant-in-aid system of staggering complexity and diversity. Many of us question the efficiency of this intergovernmental financial system which is based on the Federal categorical grant. Its growth since the end of 1962 has been near explosive. Then there were 53 formula grant and 107 project grant authorizations--a total of 160. Four years later on January 1, 1967, there were 379 such grant authorizations.

While effective in many instances, this rapid growth in Federal grants has been accompanied by:

--Overlapping programs at the State and local level.

--Distortion of State and local budgets.

--Increased administrative costs.

--Program delay and uncertainty.

--A decline in the authority and responsibility of chief executives, as grants have become tied to functional bureaucracies.

--Creation of new and frequently competitive state and local governmental institutions.

Another inevitable result of this proliferation of Federal programs has been a gathering of the reins of power in Washington. Experience has taught us that this is neither the most efficient nor effective way to govern; certainly it represents a radical departure from the vision of Federal-State relations the nation's founders had in mind.

This Administration brought into office both a commitment and a mandate to reverse the trend of the last three decades--a determination to test new engines of social progress. We are committed to enlist the full potential of the private sector, the full potential of the voluntary sector and the full potential of the levels of government closer to the people.

This week, I am sending to Congress for its approval for Fiscal Year 1971, legislation asking that a set amount of Federal revenues be returned annually to the States to be used as the States and their local governments see fit--without Federal strings.

Because of budget stringencies, the initial fund set aside to start the program will not be great--$500 million. The role of the Federal government will be redefined and re-directed. But it is my intention to augment this fund annually in the coming years so that in the Fiscal Year beginning in mid-1975, $5 billion in Federal revenues will be returned to the states without Federal strings. Ultimately, it is our hope to use this mechanism to so strengthen State and local government that by the end of the coming decade, the political landscape of America will be visibly altered, and States and cities will have a far greater share of power and responsibility for solving their own problems. The role of the Federal Government will be re-defined and re-directed toward those functions where it proves itself the only or the most suitable instrument.

The fiscal case for Federal assistance to States and localities is a strong one. Under our current budget structure, Federal revenues are likely to increase faster than the national economy. At the local level, the reverse is true. State and local revenues, based heavily on sales and property taxes, do not keep pace with economic growth, while expenditures at the local level tend to exceed such growth. The result is a "fiscal mismatch," with potential Federal surpluses and local deficits.

The details of this revenue sharing program were developed after close consultation with members of the Congress, governors, mayors, and county officials. It represents a successful effort to combine the desirable features of simplicity and equity with a need to channel funds where they are most urgently needed and efficiently employable.

The program can best be described by reviewing its four major elements.

First, the size of the total fund to be shared will be a stated percentage of personal taxable income--the base on which Federal individual income taxes are levied. For the second half of Fiscal Year 1971, this will be one-third of one percent of personal taxable income; for subsequent fiscal years this percentage will rise to a regular constant figure. In order to provide for the assured flow of Federal funds, a permanent appropriation will be authorized and established for the Treasury Department, from which will be automatically disbursed each year an amount corresponding to the stipulated percentage.

Second, the allocation of the total annual fund among the 50 States and the District of Columbia will be made on the basis of each State's share of national population, adjusted for the State's revenue effort.

The revenue effort adjustment is designed to provide the States with some incentive to maintain (and even expand) their efforts to use their own tax resources to meet their needs. A simple adjustment along these lines would provide a state whose revenue effort is above the national average with a bonus above its basic per capita portion of revenue sharing.

Third, the allocation of a State's share among its general units of local government will be established by prescribed formula. The total amount a State will share with all its general political subdivisions is based on the relative roles of State and local financing in each State. The amount which an individual unit of general local government will receive is based on its share of total local government revenue raised in the State.

Several points should be noted about these provisions for distribution of a State's portion of revenue sharing.

--The distribution will be made by the State.

--The provisions make allowance for State-by-State variations and would tend to be neutral with respect to the current relative fiscal importance of State and local governments in each State.

--In order to provide local flexibility, each State is authorized to develop an alternative distribution plan, working with its local governments. Fourth, administrative requirements are kept at a minimum. Each State will meet simple reporting and accounting requirements.

While it is not possible to specify for what functions these Federally shared funds will provide--the purpose of this program being to leave such allocation decisions up to the recipient units of government-an analysis of existing State and local budgets can provide substantial clues. Thus, one can reasonably expect that education, which consistently takes over two-fifths of all state and local general revenues, will be the major beneficiary of these new funds. Another possible area for employment of shared funds, one most consistent with the spirit of this program, would be for intergovernmental cooperation efforts.

This proposal marks a turning point in Federal-State relations, the beginning of decentralization of governmental power, the restoration of a rightful balance between the State capitals and the national capital.

Our ultimate purposes are many: To restore to the States their proper rights and roles in the Federal system with a new emphasis on and help for local responsiveness; to provide both the encouragement and the necessary resources for local and State officials to exercise leadership in solving their own problems; to narrow the distance between people and the government agencies dealing with their problems; to restore strength and vigor to local and State governments; to shift the balance of political power away from Washington and back to the country and the people.

This tax-sharing proposal was pledged in the campaign; it has long been a part of the platform of many men in my own political party--and men in the other party as well. It is integrally related to the national welfare reform. Through these twin approaches we hope to relieve the fiscal crisis of the hard-pressed State and local governments and to assist millions of Americans out of poverty and into productivity.

RICHARD NIXON

The White House

August 13, 1969