Federal-State Revenue Sharing

Report Outline
Proposal to Share Federal Tax Revenue
Rapid Growth of Federal Grants-In-Aid
Staying Power of Federal Aid Programs
Special Focus

Proposal to Share Federal Tax Revenue

Provisions and Purpose of Heller Sharing Plan

Plans to distribute a fixed percentage of federal income S. tax revenue among the states, if and when the federal budget again produces an annual surplus, may be expected to attract growing attention as state and local revenue need's continue to mount. The current estimate is that annual state and local government expenditures will climb within a decade to $120 billion—about $40 billion more than now. To meet such huge outlays, states and localities will require additional sources of revenue, but new tax sources have virtually disappeared and existing taxes are already burdensome. Access to a share of the federal government's tax receipts, therefore, would be a godsend.

The revenue-sharing proposal that has been under discussion recently would supplement existing large federal aid programs but would differ from them in providing for distribution of funds with few or no strings attached. The plan was first advanced four and one-half years ago by Walter W. Heller, who recently resigned as chairman of the President's Council of Economic Advisers. When Heller, then chairman of the University of Minnesota's economics department, suggested in a speech on June 6, 1960, that an agreed share of federal income tax receipts be diverted to the states, the proposal drew little notice; the country was in a recession and no surplus of federal revenues was in sight. Since then, the economic picture has considerably brightened. Although federal expenditures still exceed federal receipts, economic experts foresee a budgetary surplus within two years if tax receipts continue to rise at the present rate of around $6 billion a year and if spending is held down.

In essence, the Heller revenue-sharing proposal is a scheme to ward off recurrent federal budget surpluses. Heller rejects the theory, often voiced by conservative economists and members of Congress, that all excess federal revenue should be applied to reduction of the national debt. He contends that prolonged piling up of surpluses would produce “fiscal drag”; that is, it would retard growth of the economy in the absence of full employment.