Federal Revenue Sharing: A Standing Counter-Cyclical Fiscal Policy Mechanism for State and Local Aid
The GRS and the SLFRF are examples of counter-cyclical fiscal policy for state and local aid under different economic and political contexts. Targeted use could assist local governments experiencing socio-economic distress (high unemployment and poverty).
Federal grants-in-aid programs provide fundamental support to state and local government programs in the modern era. The recent Coronavirus Aid Relief, and Economic Security (CARES) Act, enacted in March 2020, allocated $150 billion in federal payments to state and large local governments through the establishment of Coronavirus State and Local Fiscal Recovery Funds (Congress.gov, 2020). A second round of assistance was enacted via the American Rescue Plan Act of 2021, which allocated $350 billion in general assistance payments to state and local units (MI Department of Treasury, 2022). A grant fund of this size and breadth to local governments has not been seen since the passage and implementation of the State and Local Fiscal Assistance Act of 1972– more commonly known as the General Revenue Sharing program (GRS).
In its more than decade and a half run, the United States’ GRS program transferred more than $83 billion in funds from the federal government to state and local governments. Like general revenue sharing, a large proportion of CARES and ARPA money is given to local governments based on population size and other factors (with notably simpler formulas for disbursements of state and local ARPA funds). See the companion report to this piece on the specifics of the American Rescue Plan Act Coronavirus State and Local Fiscal Relief Funds. Unlike revenue sharing, however, expenditures must be related to impacts of the COVID-19 pandemic (and not used to cover budget deficits existing pre-COVID). With changes in the Treasury’s Final Rule for ARPA fund usage, however, local governments can opt to put $10 million of their funds (or the localities entire allocation, whichever is less) towards “revenue replacement”, a deliberately broad category that puts ARPA money much more in line with the GRS than initially anticipated.
In this report, we discuss a brief history of federal grants-in-aid programs in the U.S. and more specifically of The State and Local Fiscal Assistance Act of 1972 (Public Law 92-512) commonly known as the Revenue Sharing Act and whether ARPA SLFRF could spark renewed support for a similar program of fiscal equalization. Fiscal equalization is “a transfer of fiscal resources across jurisdictions with the aim of offsetting differences in revenue raising capacity or public service cost. Its principal objective is to allow sub-central governments to provide their citizens with similar sets of public services at a similar tax burden.” (Blöchliger et al., 2007). With the exception of the years of the GRS, the U.S. is the only major democracy that does not have a system of fiscal equalization at the national level, although many state governments address local property tax disparities with equalization policies. Such a program could address state and local government liquidity issues, synchronize federal and state-local fiscal policy, and in general help close subgovernment budget deficits. These have been major economic issues in the last several decades, requiring temporary aid from stimulus bills like the American Recovery and Reinvestment Act of 2009 (and more recently the American Rescue Plan Act), to prevent the complete fiscal meltdown of state and local governments.
While bipartisan acknowledgment of the growing budget deficit and public debt is clear, agreement as to its purpose is much more tenuous. Lack of funding is one of the first arguments used to shut down policy proposals. This was true as well in the case of the 1972 General Revenue Sharing program, and continues to be true of Federal aid to states and local governments today. Emergency funding allocated through the CARES Act and the American Rescue Plan Act to combat the COVID-19 pandemic are examples of programs with bipartisan support that are reminiscent of the GRS of the 1970s and 80s. They are also examples of two formulas by which federal revenue sharing could be continued. Congress could be ready with a standing countercyclical fiscal policy mechanism to provide funds to fill in the gap of resources state and local governments experience (Galbraith, Lind, and Luby, 2020).
Economists and policy experts acknowledge that the economic conditions faced today would be much worse if not for the substantial economic stimulus provided by ARPA (Ross et al., 2022; Trattner, 2022). Following second quarter 2022, the U.S. may have entered a technical recession (Gulliver-Needham, 2022). This determination is based on the criteria that most of the world uses to determine a recession– two consecutive quarters of negative gross domestic product growth. However, the US approaches recession differently. The National Bureau of Economic Research determines recession based on a range of factors such as GDP, real income and employment. The NBER has not yet (as of October 17, 2022) designated the US economy as being in recession. ARPA funds made available to state and local governments are helping to maintain a strong, employed workforce. Should the U.S. implement a form of GRS that could be scaled up in times of economic shock (such as in the case of a global pandemic), it could give Congress a mechanism to provide general aid without needing to come up with entirely new spending bills in the throes of the downturn. In short, the ARPA SLFRF could help reposition federal revenue sharing as a standing counter-cyclical fiscal policy mechanism for state and local aid. Continued monitoring of the impacts of ARPA will provide more information about how and under what conditions it might be designed.
Blöchliger, Hansjörg, Olaf Merk, Claire Charbit & Lee Mizell. 2007. “Fiscal Equalisation in OECD Countries.” OECD Network on Fiscal Relations Across Levels of Government, Working Paper No. 4.
Congress.gov. 2020. "Text - S.3548 - 116th Congress (2019-2020): CARES Act."
Galbraith, James K, Michael Lind and Martin J. Luby. 2020. “The Case for Revenue Sharing: Fiscal Equalization and the COVID-19 Recession” in Resiliency in the Age of Covid: A Policy Toolkit. University of Texas at Austin LBJ School.
Gulliver-Needham, Elliot. 2022. “US Economy Enters Technical Recession.” Investment Week. July 28 2022. Accessed from https://www.investmentweek.co.uk/news/4053937/us-economy-enters-technical-recession#:~:text=US%20GDP%20contracted%200.9%25%20in,with%20experts%20predicting%200.5%25%20growth
Ross, Kyle, Arohi Pathak, Seth Hanlon, Mia Ives-Rublee, Justin Schweitzer, Michela Zonta, Natasha Murphy, Osub Ahmed, and Marina Zhavoronkova. 2022. The ARP Grew the Economy, Reduced Poverty, and Eased Financial Hardship for Millions. The Center for American Progress. Accessed from https://www.americanprogress.org/article/the-arp-grew-the-economy-reduced-poverty-and-eased-financial-hardship-for-millions/
Trattner, Charlotte. 2022. “$1.9T American Rescues Plan Saved U.S. From Economic Disaster: Janet Yellen.” Newsweek. January 19 2022. Accessed from https://www.newsweek.com/19t-american-rescue-plan-saved-us-economic-disaster-janet-yellen-1670939