Revenue Sharing? Again? Really?

There’s no quicker way to get long-time federal budget watchers to curl up in a fetal position and rock back and forth while moaning in pain than to mention three words: general revenue sharing. Yet Robert Shiller not only used that phrase this morning in this excellent piece in The New York Times, he recommended that the program be brought back to life as a way to help state and local governments out of their fiscal problems and, therefore, to help fix the U.S. economy.

Some background for those too young to remember or for who the original experience is still too painful to recall voluntarily.

As Shiller notes, GRS was a Richard Nixon initiative. What Shiller doesn’t say, however, is that Nixon proposed it right after the U.S. had a $3.2 billion budget surplus in fiscal 1969. That was the year the Social Security and other trust funds were added to the rest of the budget to create the “unified” presentation recommended by the 1967 President’s Commission on Budget Concepts. That year the approximately $3.8 billion surplus in the trust funds overwhelmed the $507 million on-budget deficit (“millions” seem quaint by today’s standards) to create the unified surplus. But in the immediate years that followed, the growing spending for the wars in Vietnam and Cambodia meant the trust fund surplus wasn’t large enough to offset the on-budget deficit. In fact, there wasn’t another surplus until the Clinton administration in 1998.

The lack of surplus general revenues didn’t stop Nixon from proposing that they be distributed or “shared” with the states and local governments. Even though the one surplus had been $3.2 billion, GRS somehow became an annual $6.9 billion distribution.

The program became controversial toward the end of the 1970s as fiscal conservatives said that it should be eliminated to reduce the federal deficit. I was a staffer on the House Budget Committee at the time and still remember one of our members — Rep. Jim Maddox (D-TX) — arguing whenever he could that the program should be eliminated because the federal government had no excess revenue to share.

There was also a notable dinner meeting at the White House between President Jimmy Carter and a number of governors. Carter, a former governor himself, was attempting to reach out to a group that he thought would be sympathetic and natural supporters. By all accounts the meeting went well until the end when New York Governor Hugh Carey said aloud that if Carter had any plans to cut the $2.3 billion state share of General Revenue Sharing he had just wasted a dinner.

The state share of GRS then became one of the longest running inside jokes in federal budgeting: It was always one of the things on the chopping block and one of the things others proposed be cut to pay for their new initiatives. It was proposed to be eliminated so many times by so many people over so many years that you would have thought the state share was 10 times larger than it really was. It was eliminated in 1981; the rest of the program ended in 1986.

One of the complaints about continuing GRS was that many of the state and local governments that were receiving funds had budget surpluses and, therefore, were in better fiscal shape than the federal government. As Shiller notes, that’s not the case today.

Shiller says in his piece that a new revenue sharing program should be enacted “temporarily” to deal with the current economic situation. In that sense his proposal is more like the “counter cyclical” revenue sharing that was created in 1980. As the House report accompanying the legislation said, under counter cyclical revenue sharing

… funding would be triggered when the national economy has experienced two consecutive quarterly declines in both real gross national product and real wages and salaries [emphasis added] (that is, corrected for inflation). Once a recession has been confirmed by these declines, funds would be provided for each recession quarter in relation to the severity of the recession. The program would be funded at a rate of $10 million for each one-tenth percentage point decline in real wages and salaries measured from the pre-recession base — the average of the real wages and salaries for the two quarters preceding the decline. The amount of money allocated in any one quarter would be limited to $300 million.

The counter cyclical program was authorized but never funded.

Washington providing state and local governments with additional funds to help the economy is necessary. But the past experience with GRS was so bad that I doubt a new version could be adopted quickly not just in the current political environment but at any time.

The reason is that the fights over the funding formulas when GRS was enacted and re-enacted might have been mild by today’s standards but it was as bitter as it could be back then. There is every reason to believe that those fights would be far worse today and that, if a compromise could be developed at all, it would take far longer than we have to get it done. There’s also the PR baggage that would exist because of the original program that could/would doom the effort from the start. There’s simply no reason to fight that fight.

If it’s doable at all, rather than to resurrect an old program or create a new one, the only way to get money to the states and local governments quickly may be for Washington to provide a reimbursement to them for some federally mandated cost. That would be revenue sharing by a different name. But it would also cut across party lines because it would appear to deal with a key GOP complaint about federal mandates.

Otherwise, Jim Maddox and Hugh Carey might rise up from the grave and be heard from again inside the beltway.

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