General Revenue Sharing: Background and Analysis

Publication Date: January 2009

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

This report provides background and analysis of the general revenue sharing program (GRS) as authorized in the State and Local Fiscal Assistance Act of 1972 (P.L. 92-512, the 1972 Act). The GRS program was extended three times before finally expiring on September 30, 1986. Over the almost 15-year life of the GRS program (1972 through 1986), over $83 billion was transferred from the federal government to state and local governments. From 1972 to 1980, states received approximately one-third of the grants and local governments received two-thirds. State governments were excluded from GRS beginning in the 1981 fiscal year (FY).

Some policymakers have suggested using the original GRS program as a model for a new, short-term, GRS program. The FY2004 budget resolution contained a proposal (H.Con.Res. 95, Sec. 605) expressing a sense of the Senate that $30 billion should be set aside over the next 18 months for state fiscal relief. By comparison, in 1972, the federal government authorized $8.3 billion ($35.9 billion in 2002 dollars) for the first 18 months of the original GRS program.

The rationale behind GRS in 1972 cannot be traced to a single political or economic objective, such as economic stimulus. The turbulent economic and political environment that characterized the 1960s and 1970s led proponents and opponents of GRS to modify their political and economic arguments as that environment changed. Generally, GRS could be implemented to (1) initiate intergovernmental fiscal reallocation; (2) address state and local government liquidity crises; and (3) synchronize federal and state-local fiscal policy. A revised GRS program intended to help close state budget deficits (estimated to be $21.5 billion for the last two months of FY2003) has been advocated based on the last two objectives.

The budget crisis facing state and local governments in 2003 is well documented, and federal assistance, unconditional or categorical, would be welcomed by state and local policymakers. A GRS program designed as a countercyclical initiative would encounter two primary implementation issues: fiscal policy time lags and variability in the state response to GRS grants. In addition, as with all fiscal policy, the overall size of the additional federal spending is critical to the impact of the fiscal stimulus.

For more on the relative merits of tax cuts versus spending increases, such as GRS grants, for fiscal stimulus, see CRS Report RL30839, Tax Cuts, the Business Cycle, and Economic Growth: A Macroeconomic Analysis, by Marc Labonte and Gail Makinen. For more on the size and scope of current federal grants to state and local governments, see CRS Report RS20669, Federal Grants to State and Local Governments: An Overview and Characteristics, by Ben Canada.

This report provides general background and analysis and does not track current legislation. It will not be updated.