Revenue Sharing

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REVENUE SHARING

REVENUE SHARING occurs when a government shares part of its tax income with other governments. State governments, for example, may share revenue with local governments, while national governments can share revenue with state governments. The amount of revenue shared is determined by law. Generally, the governments that receive the monies are free from any stipulations about or controls on how to use them. In some cases, however, the receiving government may be required to match the amount granted.

Forms of revenue sharing have been used in several countries, including Canada and Switzerland. In the United States, the idea of revenue sharing evolved in response to complaints that many of the vigorously monitored grant-in-aid programs created their own expensive and inefficient bureaucracies. Under the auspices of economist Walter Heller, the U.S. government created its own revenue-sharing programs. In October 1972, President Richard M. Nixon signed into law the State and Local Assistance Act, a modest revenue-sharing plan that allocated $30.2 billion to be spread over a five-year period. The funds were distributed so that one-third went to state governments and two-thirds to local governments. Matching funds were not required, and broad discretionary powers were given to the state and local governments in spending the funds.

However, not everyone embraced the idea of revenue sharing; critics of the program argued that revenue sharing replaced rather than supplemented categorical grants and was inadequate to meet the needs of big cities. Nevertheless, the Gerald Ford and James Earl Carter administrations continued the experiment in revenue sharing. Between 1972 and 1986, money collected in federal taxes was given to state and local governments, with few restrictions placed on how those funds could be used. The notion guiding this practice was that local and state needs varied, and elected officials at either level would be more effective at identifying those needs than would officials of the federal government. Communities held public hearings on how the money ought to be spent. One of the few stipulations imposed upon localities and states was that there could be no racial discrimination on how the monies were dispersed. Public audits were also required. As a result, small towns and counties, as well as large cities, received direct federal aid.

During the fourteen years in which the program operated, administrative costs were extremely low and a total of $85 billion reached American communities. General revenue sharing continued into the 1980s, although the amounts allocated steadily diminished. Although still in use, revenue sharing was hampered by the general downturn in the economy that took place after September 2001, which left less money available to fund such programs.