State and Local Fiscal Assistance Act of 1972

Federal revenue sharing, what’s that? Most leaders of Michigan’s local governments may not have any memory of federal revenue sharing, since it was last available to localities in 1986. Could it be reestablished? It sure can.

President Nixon State of the Union speech in the U.S. Capitol.

What would you like to see your community do with its portion of the $4.4 billion federal support Michigan localities will soon have in their bank accounts?  You may be feeling like it’s too good to be true and the prudent thing would be to not invest in programs and initiatives which cannot be self-sustained with local own source funds. That’s a rational feeling. Most leaders of Michigan’s local governments most likely don’t have any memory of federal revenue sharing, since it was last available to localities in 1986.

So when did a federal revenue sharing program come into being?  President Nixon signed the State and Local Fiscal Assistance Act of 1972 which authorized the federal revenue sharing (FRS) grants to state and local governments. The FRS program was initially authorized for four years. It was extended three times, in 1976, 1980 and 1983, before expiring in 1986 under President Reagan. FRS grants were distributed one-third to states and two-thirds of grant funds were given to local governments. Beginning in 1981, state governments were excluded from FRS.

Why did Congress and the President believe federal revenue sharing was necessary? They recognized that states and especially local governments are the front line providers of essential public services. These publicly provided services were increasing in cost and at the same time localities were finding it more and more difficult to generate the required funds locally to effectively provide these services.  These reasons were echoed in 1976 when Congress extended the FRS program an additional four years, until 1980. An additional reason stated was that Congress believed that this federal support provided stability to the economy. When Congress extended the FRS for the final time, it did so only for the local governments’ portion. The states’ portion was discontinued for budgetary reasons.

After the early 2000s recession and the beginning of a trend of “jobless recoveries” a republican lead Senate wanted to make $30 billion available to states over an 18 month period to support economic growth. Congress ended up making $20 billion available, $10 billion to states for Medicaid and $10 billion was distributed to states by population.

The last recession before the one we are currently in was the Great Recession of 2007-2009. That recession was deep and the economic recovery was historically slow. Both Presidents George W. Bush and Barack Obama enacted temporary stimulus measures. However, the sluggishness of the economy’s recovery when it comes to fiscal policy efforts, can and has been attributed to too little federal government spending.

More Congressional policymakers on both sides of the isle may be seeing the value of using federal fiscal stimulus tools to spur economic activity and employ more people. Congress under President Trump made over $3 trillion in fiscal stimulus available to combat the Coronavirus pandemic and economic downturn (not to mention the large stimulus tax cuts enacted prior to the pandemic). And now Congress under President Biden has released $1.9 trillion and said that it was a first down payment and additional economic stimulus will be coming.

What about the deficit? Maybe it doesn’t matter so much. Last month, republican and chair of the Federal Reserve, Jerome Powell, said that the strong congressional fiscal support to date has helped the economic recovery progress however just to the level of replacing lost income. In order to build productivity over time, Powell stated that Congress through fiscal investments can do this, and not the Fed.

What are the investments we want to make that will drive our productive capacity? What investments are needed to build people’s skills? What investments will raise people’s living standards over time? What are our longer-term goals? What are the real resource constraints we need to consider? Over what time frame? What if the American Rescue Plan Act with over $130 billion in local government funds is the beginning of a new federal revenue sharing effort? Imagine what our communities could be like with sustained federal resources.

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