Order Code RL31936
CRS Report for Congress
Received through the CRS Web
General Revenue Sharing:
Background and Analysis
May 23, 2003
Steven Maguire
Analyst in Public Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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General Revenue Sharing:
Background and Analysis
Summary
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.

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Contents
Background on General Revenue Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Allocation Formula . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Economic Rationale for GRS Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Fiscal Reallocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
State and Local Government Liquidity Problems . . . . . . . . . . . . . . . . . . . . . 6
Federal and State-Local Fiscal Policy Synchronization . . . . . . . . . . . . . . . . . 6
Analysis of GRS for Economic Stimulus in 2003 . . . . . . . . . . . . . . . . . . . . . . . . . 7
Magnitude of Anticipated Pro-Cyclical State Action . . . . . . . . . . . . . . . . . . 7
Implementation Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Fiscal Policy Time Lags . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
State Budget Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(1) Increase Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(2) Rescind Tax and Fee Increases . . . . . . . . . . . . . . . . . . . . . . . . 12
(3) Reduce Debt and Contribute to a Rainy Day Fund . . . . . . . . 12
Appendix: A Brief History and Analysis of Prior GRS Legislation . . . . . . . . . . 12
The 1972 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
The 1976 Extension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
The 1980 Extension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
The 1983 Extension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
List of Tables
Table 1. GRS Transfers Made Through the State and Local Fiscal
Assistance Act of 1972 and Subsequent Extensions . . . . . . . . . . . . . . . . . . . 4
Table 2. State Strategies to Eliminate FY2003 Budget Gaps . . . . . . . . . . . . . . . 11
Table 3. Change in Real GNP and Real Wages, 1980: Q2 to 1983:Q4 . . . . . . . 16

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General Revenue Sharing:
Background and Analysis
This report provides a brief history and analysis of general revenue sharing
(GRS). GRS is commonly defined as a program of federal transfers to state and local
governments that does not impose specific or categorical spending requirements on
the recipient government. The United States implemented a GRS program in 1972
that expired on September 30, 1986.
Congress may look to the bygone GRS program as an option designed to
address the remaining FY2003 and anticipated FY2004 state budget shortfalls ($21.5
billion and $72.2 billion, respectively).1 Some observers have suggested that a
revenue sharing program that provides states with grants to forestall FY2004
spending cuts and tax increases may deter pro-cyclical2 actions by states and produce
national fiscal stimulus.
An examination of the GRS program that existed from 1972 to 1986 could
provide some historical perspective if policy makers were to consider a revised GRS
program. The FY2004 budget resolution contained a proposal (H.Con.Res. 95, sec.
605) expressing a sense of the Senate that “...any legislation enacted to provide
economic growth for the United States should include not less than $30,000,000,000
for State fiscal relief over the next 18 months....”3 The first section provides a brief
overview of GRS as authorized by the State and Local Fiscal Assistance Act of 1972
(P.L. 92-512, the 1972 Act) and the three extensions.4 The second section analyzes
the economic rationale for GRS. The third section analyzes GRS in the context of
its possible use for stimulus of the nation’s economy in 2003. The appendix provides
a more detailed legislative history of the GRS program created by the 1972 Act and
its three extensions.
1 Aggregate state deficit data are from the National Conference of State Legislatures, State
Budget Update: April 2003, pp. 1-2.
2 The business cycle has peaks and troughs. Fiscal policy and monetary policy are used
together to attenuate the size of those peaks and troughs to stabilize the economy. These
actions are counter-cyclical. In contrast, pro-cyclical fiscal and monetary actions magnify
the peaks and troughs, thus destabilizing the economy.
3 U.S. Congress, Conference Committee, conference report to accompany H.Con.Res. 95,
H.Rept. 108-71, 108th Cong., 1st sess. (Washington: GPO, 2003), p. 32.
4 For a more detailed description of the 1972 Act, see U.S. Congress, Joint Committee on
Internal Revenue Taxation, General Explanation of the State and Local Fiscal Assistance
Act and the Federal-State Tax Collection Act of 1972, committee print, 92nd Cong.,
February 12, 1973, (Washington: GPO, 1973).

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CRS-2
Background on General Revenue Sharing
General revenue sharing (GRS) is typically defined as unconditional federal
grants to state and local governments. These grants are intended to provide state and
local governments with spending flexibility. The total grant amount is fixed
annually, sometimes called “closed-ended,” and allocated to the recipient
governments by formula. GRS has not been explicitly identified as a primary tool
to provide counter-cyclical assistance. The GRS program created by the 1972 Act
exemplifies how a GRS program can work.
Amount
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.
To achieve a comparable magnitude of assistance today, approximately $226 billion
would need to be distributed over the next 15 years. Table 1 provides detailed
information on the 17 entitlement periods for the GRS grants (as provided for in the
1972 Act and subsequent extensions, both in nominal dollars and adjusted to 2002
dollars). The estimates provided in Table 1 for 2002 can be thought of as the relative
value of a commitment made in the past in current dollars. For example, a $1
commitment in 1972 would be equivalent to a $4.30 commitment in 2002.
The payment periods in the 1972 Act were designed to roughly follow the
budget calendars of state and local governments. The grants in subsequent
extensions tracked the federal budget calendar.5 Note that after FY1980, only local
governments, not states were entitled to GRS grants.
5 Unlike the federal government, most state and local government fiscal years begin July 1
and end on June 30. The fiscal year begins in July for 46 states, October for two states (AL
and MI), April for one (NY), and September for one (TX). Thirty states use an annual
budget cycle, while the other 20 use a biennial cycle.

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CRS-3
Allocation Formula
GRS allocations were determined by a formula that used a combination of the
following variables: tax effort, population, and per capita income.6 Generally, the
greater the tax effort and population, the larger the grant. In contrast, the higher the
per capita personal income, the smaller the grant.
The first step in the allocation procedure was to calculate each state’s share
based on the three variable formula. After each state’s share was determined, one-
third of the total amount was allocated to the state government and two-thirds to local
general purpose governments within the state.7 The two-thirds portion was then
distributed to each geographically defined county (parish) area within the state using
the same three variable formula used to determine the state share. Each government
within the county area then received an amount equal to the ratio of taxes it collected
to total taxes collected by all general purpose governments in the county.8
The allocation formula was criticized for generating inequitable treatment of
local governments. Generally, the arguments arose from “...similar governments
within a state receiv[ing] different revenue sharing payments, primarily because of
their geographic location.”9 According to a GAO report, “These inequities are
created primarily by tiering allocation procedures whereby revenue sharing funds are
first allocated to county geographic areas.”10
6 An alternative, yet similar, five-variable formula (the “House” formula) was also used for
determining the initial state share. The five variable formula included the three mentioned
variables plus the state’s urbanized area and income tax collections. The state chose the
formula that produced the largest grant. Tax effort is a measure of taxes as a fraction of
ability to pay. Two states with the same ability to pay and the same amount of taxes
collected would receive equal tax effort scores. If a state raised more from the same ability
to pay, it would receive a higher tax effort score.
7 The automatic state GRS allocation was discontinued after FY1980.
8 All tax calculations were adjusted to exclude taxes collected exclusively for schools.
9 More detail on this critique of the old allocation scheme can be found in the following:
U.S. General Accounting Office, Changes in Revenue Sharing Formula Would Eliminate
Payment Inequities; Improve Targeting Among Local Governments, GAO Report GGD-80-
69 (Washington: June 10, 1980).
10 GAO, Changes in Revenue Sharing Formula Would Eliminate Payment Inequities;
Improve Targeting Among Local Governments, p. ii.

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CRS-4
Table 1. GRS Transfers Made Through the State and Local
Fiscal Assistance Act of 1972 and Subsequent Extensions
Amount Entitledb
(in $ millions)
Entitlement Period
Datesa
1972
2002
($ nominal)
($ current)
Original 1972 Act (P.L. 92-512)
Period 1
January 1, 1972 to June 30, 1972a
$2,650.0
$11,475.0
Period 2
July 1, 1972 to December 31, 1972a
$2,650.0
$11,475.0
Period 3
Jan. 1, 1973 to June 30, 1973
$2,988.0
$12,938.0
Period 4
July 1, 1973 to June 30, 1974
$6,050.0
$26,197.0
Period 5
July 1, 1974 to June 30, 1975
$6,200.0
$26,847.0
Period 6
July 1, 1975 to June 30, 1976
$6,350.0
$27,496.0
Period 7
July 1, 1976 to December 31, 1976
$3,325.0
$14,398.0
Total
January 1, 1972 to December 31, 1976
$30,213.0
$130,826.0
1976 Extension (P.L. 94-488)
Period 8
January 1, 1977 to September 30, 1977
$4,988.0
$15,770.5
Period 9
October 1, 1977 to September 30, 1978
$6,850.0
$21,657.6
Period 10
October 1, 1978 to September 30, 1979
$6,850.0
$21,657.6
Period 11
October 1, 1979 to September 30, 1980
$6,850.0
$21,657.6
Total
January 1, 1977 to September 30, 1980
$25,538.0
$80,743.2
1980 Extension for Local Governments Only (P.L. 96-604)
Period 12
October 1, 1980 to September 30, 1981
$4,566.7
$9,970.2
Period 13
October 1, 1981 to September 30, 1982
$4,566.7
$9,970.2
Period 14
October 1, 1982 to September 30, 1983
$4,566.7
$9,970.2
Total
January 1, 1980 to September 30, 1983
$13,700.1
$29,910.7
1983 Extension for Local Governments Only (P.L. 98-185)
Period 15
October 1, 1983 to September 30, 1984
$4,566.7
$8,248.5
Period 16
October 1, 1984 to September 30, 1985
$4,566.7
$8,248.5
Period 17
October 1, 1985 to September 30, 1986
$4,566.7
$8,248.5
Total
October 1, 1983 to September 30, 1986
$13,700.1
$24,745.4
Grand Total
January 1, 1972 to September 30, 1986
$83,151.2
$266,225.4
Source: Public laws cited in table and CRS calculations.
a. Because the act was signed into law in October of 1972, retrospective payments were made for
periods one and two, in December 1972 and January 1973, respectively.
b. The adjustment for 2002 dollars was calculated based on the CPI for the year in which the
legislation authorizing the entitlements was passed. For example, the adjusted value of the 1983
extension was calculated using the CPI for 1983, dividing it into the 2002 CPI, and multiplying
the result by the three period payments.

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CRS-5
Economic Rationale for GRS Grants
From the time the active debate surrounding GRS began in the 1960s, through
eventual passage of the 1972 Act and subsequent extensions, general economic
conditions and the political environment changed dramatically. Thus, the proponents
and opponents of GRS modified their political and economic arguments depending
on the current political and economic conditions. Because of this turbulence, the
rationale behind GRS cannot be traced to a single political or economic objective.
This section of the report summarizes three frequently mentioned economic
rationales behind GRS: to initiate an intergovermental fiscal reallocation, to address
state and local government liquidity crises, and to synchronize federal and state-local
fiscal policy.
Fiscal Reallocation
Fiscal reallocation has two components. Generally, under a GRS program, state
and local tax regimes are partly replaced by the federal tax regime. Also, the federal
spending objectives are replaced, in part, by state and local spending priorities.
Proponents of reallocation cite the more “progressive,” and thus desirable,
structure of federal taxes.11 However, an assessment of the merits of a more
progressive tax structure require subjective claims of what is “fair” taxation. Even
if there is agreement that a more progressive structure is needed for fairness, it is
unclear that GRS on the relatively small scale of the previously implemented
program could achieve that objective.
GRS would also shift government spending decisions for the grant amount from
the federal government to state and local governments. The rationale for such a shift
can be traced to the assertion that state and local governments are better able to
understand and satisfy the preferences of their residents. A reallocation through GRS
could also address the “assignment” issue. The assignment issue arises when the
revenue productivity of a government does not match the spending requirements for
the public services assigned to that level of government. Although these
observations may be true for some publicly provided goods and services, it is not
clear that nationally, the net gain in spending efficiency alone would justify a GRS
program. And, the small relative size of a GRS program relative to overall tax
collections would limit any gains in government spending efficiency.
The arguments for and against fiscal reallocation are subjective because they
rely on measuring fairness. Some would argue that a more progressive tax system
is patently unfair, while others would argue that a tax system that redistributes
income is more equitable and desirable. Fiscal reallocation would change the
11 Most research has found that state and local tax regimes are generally more regressive
because they rely much more heavily on sales and property taxes than on income taxes. The
sales tax is viewed as a very regressive tax whereas the property tax has been cast as mildly
regressive. However, some research has found that with a different set of assumptions, the
property tax could be mildly progressive.

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CRS-6
structure of government fiscal relationships, but analysis of the degree to which it
does and the desirability of such a shift are beyond the scope of this report.
State and Local Government Liquidity Problems
State, and more specifically, local governments, often face fiscal liquidity
problems that arise from revenues that fluctuate more dramatically with the business
cycle than do expenditures. As the economy slows, revenue falls more sharply than
expenditures, creating a budget deficit. Governments without sufficient reserves are
then compelled to reduce expenditures or raise taxes to balance their budgets. State
and local governments cannot use debt to close deficits because of state constitutional
or statutory restrictions requiring a balanced budget. In contrast, the federal
government can issue more debt when expenditures exceed revenue. A
countercyclical GRS program could help alleviate these relatively short-term liquidity
problems for states.
Opponents of federal assistance to state and local governments during economic
slowdowns suggest that poor state-local fiscal management creates deficit problems.
State and local governments could “save” surplus revenue during economic
expansions to then use when the economy contracts and revenue falls. If the rise and
fall of revenue is symmetric, then the revenue saved should be sufficient to cover
revenue shortfalls when the economy slows. However, research has shown that state
government budgets are generally asymmetric over the business cycle.12 State and
local governments tend to save less during expansions for a variety of reasons.
Political pressure from voters to reduce taxes when large budget surpluses accrue is
a commonly cited reason.
Federal and State-Local Fiscal Policy Synchronization
This objective is related to the liquidity objective discussed above. However,
the rationale for a long-term GRS program designed for economic stabilization is
somewhat different than a one-time grant to remedy a temporary fiscal imbalance.
The federal government will typically employ monetary and fiscal policy to help
stabilize consumption patterns and the price level as the economy cycles between
periods of growth and recession. Generally, stimulative fiscal policy is implemented
through tax reductions or increased government spending. In theory, tax reductions
and/or increased government spending stimulates the demand for goods and services.
The increased demand for goods and services then leads to economic expansion and
recovery. This fiscal policy counters the economic downturn and is thus termed
countercyclical fiscal policy.
However, state and local governments may mitigate countercyclical federal
fiscal policy if they are forced to raise taxes and reduce expenditures during
recessions. Such a “pro-cyclical” state and local government response could
undermine any federal fiscal stimulus. During economic downturns, this rationale
12 Bent E. Sorensen and Oved Yosha, “Is State Fiscal Policy Asymmetric Over the Business
Cycle?,” Federal Reserve Bank of Kansas City Economic Review, Third Quarter, 2001, pp.
43-64.

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CRS-7
played a more prominent role for proponents of general revenue sharing. While
debating the 1976 extension, Senator Muskie offered the following rationale for
GRS:
...we at the Federal level are trying to speed up economic recovery by cutting
taxes, [while] state and local governments are being forced to raise their own
taxes, thus delaying the impact of the Federal effort.13
The economic situation in the early to mid 1970s, about the time of initial
passage of GRS, may seem similar to today’s economic situation. However, the
1973-1975 recession was much deeper and longer and coincided with a sharp oil
supply shock that the current downturn has not experienced.14 Nevertheless, the
debate surrounding countercyclical aid to the states today is reminiscent of the 1975-
1976 debate.15
Analysis of GRS for Economic Stimulus in 2003
This section analyzes how GRS might affect the economy if implemented in
2003. The first subsection describes the potential size of GRS compared to current
state deficits. The second section analyzes implementation issues that may arise if
a new GRS program were authorized, including a discussion of how states might use
new federal grants.
Magnitude of Anticipated Pro-Cyclical State Action
The principal question is: “Will the supposed pro-cyclical state actions in the
absence of federal assistance dampen the effect of federal fiscal policy?” From a
national economic perspective, closing the remaining state FY2003 budget gaps with
revenue sharing would likely have little if any effect on the national economy. The
remaining FY2003 gap of $21.5 billion (as of April 2003) is approximately 0.20%
of the U.S. GDP of $10.5 trillion, hardly enough to effectuate a stimulative
response.16
13 Edmund Muskie, “Revenue Sharing and Countercyclical Assistance,” in General Revenue
Sharing and Decentralization, Walter F. Schefer, editor (Norman, OK: University of
Oklahoma Press, May, 1976), p. 72.
14 For more on the relative size of U.S. recessions, see CRS Report RL31237, The Current
Economic Recession: How Long, How Deep, and How Different from the Past?, by Marc
Labonte and Gail Makinen.
15 Congress did enact two relatively small countercyclical assistance programs. P.L. 94-369
included an authorized maximum amount of $1.375 billion for countercyclical assistance
over five quarters, beginning July 1, 1976. The funds would be released to state and local
governments provided certain national economic thresholds were crossed. P.L. 95-30
contained an extension of the countercyclical aid program, authorizing a maximum of $1
billion for FY1977 and $2.25 billion for FY1978. No federal funds were spent under either
authorization.
16 State cumulative deficit data are from the National Conference of State Legislatures, State
(continued...)

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CRS-8
The size of the federal transfer, of course, could be much larger. State
governments have already raised taxes or reduced expenditures to close a combined
deficit of $49.1 billion for the FY2003 budget. (The FY2003 budget year began on
July 1, 2002 in most states. State legislatures enacted many revenue raising
measures, implemented spending cuts, and drew down rainy day funds to submit a
balanced FY2003 budget.) The deficit estimates reported in the first half of 2003
arose after passage of the FY2003 budgets and were not anticipated. Some states
might use new federal grants to rescind tax and spending actions already in place for
FY2003. Such reversals would roughly triple the relative size of the revenue sharing
stimulus.
In addition, and perhaps more importantly, states are likely to implement
additional measures to close the anticipated FY2004 combined deficits even if the
economy recovers in the second half of 2003.17 The cumulative deficit of the states
facing budget shortfalls for FY2004 was estimated in April of 2003 at $72.2 billion.
State revenue collections usually lag an economic recovery which further increases
the probability of additional budget action for FY2004. According to the National
Association of State Budget Officers (NASBO),
... a lag will exist between national economic recovery and when growth is strong
enough to be reflected in healthier state budgets. Based on an examination of
state budget shortfalls and total state revenues during the early 1990s recession,
that lag is between 12 and 18 months.18
A one-time GRS type grant to states that closed the estimated FY2003 fiscal
imbalance of $21.5 billion and forestalled anticipated state spending cuts and tax
increases for FY2004 of $72.2 billion could provide approximately $96.2 billion of
fiscal stimulus. This assumes other federal spending would be reduced and the states
spent the federal grant immediately.
The degree of stimulus would be tempered by the net spending response of the
recipient government. Research has generally shown that for every $1 lump sum
transfer, only a portion is translated into new spending.19 For example, assume a
state has planned spending of $100 to be paid with own source tax revenue of $100.
Under this leakage theory, a $10 transfer from the federal government would not lead
to $110 of spending. Instead, the state may lower own-source tax revenue $5 and use
16 (...continued)
Budget Update: April 2003, p. 1. The GDP data are from U.S. Department of Commerce,
Bureau of Economic Analysis, Table 1.1, Gross Domestic Product: Fourth Quarter 2002,
[http://www.bea.gov/bea/newsrel/gdp402f.htm], website visited April 22, 2003.
17 State cumulative deficit data are from the National Conference of State Legislatures, State
Budget Update: April 2003, p. 1.
18 National Association of State Budget Officers, Fiscal Survey of States, (Washington: May
2002), p. 1.
19 Edward M. Gramlich and Harvey Galper, “State and Local Fiscal Behavior and Federal
Grant Policy,” Brookings Papers on Economic Activity, vol. 1, 1973, p. 15. Gramlich and
Galper concluded that between $0.25 and $0.43 of each $1 of unconditional federal transfer
became new spending. The remaining $0.57 to $0.75 leaked from the spending stimulus.

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CRS-9
half the federal grant to cover the tax reduction. The result would be an increase in
government spending of $5, not the full $10 transferred.
Implementation Issues
The above discussion assumed that federal spending would flow seamlessly
from the federal government through states to the designated spending program.
Two factors may result in a drag on this flow. First, state government administration
may increase the lag time and second, each state would use the grant for budget
priorities of varying stimulative effect. Following is a brief analysis of these two
important implementation factors.
Fiscal Policy Time Lags. Time lags in implementation are the primary
impediment to effective fiscal stimulus.20 Generally, the objective of fiscal policy
during a recession is to boost aggregate demand and generate short term economic
stimulus. However, if the stimulus comes too late, the increased spending may occur
when the economy has already begun to revive and is approaching full employment.
In that case, the stimulus becomes pro-cyclical and possibly inflationary. Policy
makers should therefore use fiscal stimulus with caution because of the potential for
mistimed action.
GRS grants may be subject to two time lags, thus increasing the potential for
mistimed fiscal policy. The first occurs at the federal level where policy makers must
identify the need for stimulus then agree upon the size of the stimulus. Once the need
and size are determined, Congress must then agree upon a grant allocation scheme
that satisfies the competing goals of equity among jurisdictions and optimal stimulus.
For example, suppose the grant allocation formula includes a component that
provides greater assistance to states with greater need.21 If so, states that may have
been more fiscally responsible would receive less, possibly violating the fairness
criterion. However, from a broader macroeconomic perspective, aid that prevents
more layoffs and state government budget cuts would seem to deliver greater short-
term stimulus. Determining the structure of the allocation scheme could generate
considerable debate, possibly delaying initial implementation efforts.
The second time lag occurs at the state level. Federal grants that arrive before
June 30, 2003 might avert some of the pro-cyclical state actions (e.g., budget cuts)
for FY2003 for many states. If the grants arrive too late for FY2003, state budget
officials could simply add this revenue to the operating budget for FY2004 and
perhaps avoid implementing tax increases and spending cuts that would otherwise
begin on July 1, 2003. Many economists, however, believe that the economy may
be climbing out of recession by that time. Thus, there is considerable risk that the
grant program could be mistimed.
20 For more on the effectiveness of fiscal policy, see CRS Report RL30839, Tax Cuts, the
Business Cycle, and Economic Growth: A Macroeconomic Analysis, by Marc Labonte and
Gail Makinen.
21 Note that the 1972 Act GRS allocation scheme included per capita income and “tax
effort.” Jurisdictions with greater tax effort received a larger share. Jurisdictions with
lower per capita income, one potential measure of need, also received a larger share.

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CRS-10
State Budget Options. What could states do with unconditional revenue
sharing grants? Generally, states have four options for federal grants (listed in order
of stimulative response):
! increase spending,
! reduce taxes (or rescind past tax increases),
! reduce debt (or not issue more debt), and/or
! contribute to a rainy day fund (or not draw down a rainy day fund).
(1) Increase Spending. Increased spending would be the most stimulative
in the short run, because the grant is immediately injected into the economy. This
option for the states would include retaining state employees who would have been
furloughed, maintaining current operations that would have been reduced, and not
scaling back social programs such as education and healthcare. Theoretically, this
fiscal stimulus works best when government spending is quickly multiplied through
the economy.22 This means that each dollar of the federal transfer payment stimulates
the economy the most if the entire dollar is spent by the recipient and then spent
again. The degree of stimulative effect of avoided state actions, such as not
furloughing workers, depends on this “multiplier effect.” Thus, to achieve the
greatest stimulus, the most contractionary state actions should be the first avoided.
In February 2003, the National Conference of State Legislatures (NCSL) asked
budget officials from all states to categorize their strategies to reduce or eliminate
budget gaps remaining for FY2003. Table 2 below lists the strategies identified by
NCSL and the number of states proposing or implementing that strategy. The list
represents strategies that could possibly be avoided if federal GRS grants were
offered to the states.
The spending option for states that could produce the most relative stimulus for
each dollar of spending would be to avoid the separation of workers from jobs (e.g.,
layoffs, furloughs, and, to a degree, early retirement). To see why this is true,
consider what would happen if the job losses occurred. First, layoffs reduce
aggregate demand because when workers are laid off, their income would fall steeply
until they find new jobs, causing their consumption to fall. (Even though all of the
federal spending is not entirely multiplied through the economy because of
employment taxes and income taxes, the stimulative action is relatively effective
because the federal government is essentially “paying” the state employees.) Second,
since government services are included in GDP, measured economic activity would
be directly reduced as long as resources (workers) lay idle. In an environment of
rising unemployment, it is unlikely that all of these resources would quickly be put
back to use through market adjustment. If GRS prevented layoffs, these negative
effects on the economy could be avoided.
22 See CRS Report RL30839, Tax Cuts, the Business Cycle, and Economic Growth: A
Macroeconomic Analysis, cited earlier.

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Table 2. State Strategies to Eliminate
FY2003 Budget Gaps
Number of States Proposing
Strategy
or Implementing the Strategy
Spending Cuts
Across-the-Board Percentage Cuts
29
Reduce Higher Education Spending
13
Reduce Medicaid Spending
13
Reduce Local Aid
9
Reduce K-12 Education Spending
9
Reduce Corrections Spending
9
Travel Bans
9
Layoffs
8
Furloughs
5
Early Retirement
2
Revenue Raisers
Other Funds
15
Use Rainy Day Funds
10
Tobacco Settlement Revenues
7
Higher Fees
5
Raise Taxes
1
Source: National Conference of State Legislatures, “State Budget Update,”
Tables 5, 6, 7, and 8, February 2003.
The saving behavior of potentially separated employees would likely enhance
the stimulative effect of avoiding job losses. (However, avoiding induced early
retirement may provide less stimulus than avoiding furloughs and lay-offs.) If the
employees are early in their careers and/or are in low skill positions — likely
candidates for furloughs or lay-offs — it is likely that their incomes are lower than
the median for state employees. Research has shown that low income workers save
a smaller portion of their income than high income workers.23 Thus, preventing the
employment separation of low income workers should provide more relative stimulus
than the alternative of not offering early retirement.
Across-the-board cuts and reduced local aid would affect a variety of spending
programs that do not easily conform to one succinct appraisal. The stimulative effect
of avoiding across-the-board cuts would vary from state to state based on the state’s
23 Julie-Anne Cronin, “U.S. Treasury Distributional Analysis Methodology,” U.S.
Department of Treasury, Office of Tax Analysis Paper 85, Sept. 1999, Table 6, p. 16.

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CRS-12
spending pattern. Aid to local governments also falls into an uncertain category
because of differing intergovernmental transfers across states. The stimulative effect
of avoiding cuts in local aid would be positive, though the magnitude is uncertain.
(2) Rescind Tax and Fee Increases. Generally, tax cuts are less
stimulative than direct spending increases, because individuals are likely to save
some of their tax cut. Analogously, a rescinded tax increase would also be less
stimulative than spending increases because taxpayers would likely save some
portion of the reduced tax payment.
(3) Reduce Debt and Contribute to a Rainy Day Fund. Debt reduction
and contributing to a rainy day fund would offer little stimulus because such action
would be equivalent to an increase in public saving. In the short run, increased
public saving does not stimulate the economy. If the federal grants were used to
avoid tapping into tobacco revenue, the saving effect would be similar to contributing
to a rainy day fund.
The combined effect of the various potential responses of state and local
governments to federal grants is difficult to quantify a priori. Nevertheless, one
could confidently assert that $1 of federal grants would not lead to a corresponding
$1 increase in fiscal stimulus. While some state and local governments may spend
all the federal grants and not change pre-grant taxing and spending priorities, some
portions of the GRS grants would likely be used for non-stimulative purposes such
as substituting for previously planned spending or tax increases.
Appendix: A Brief History and Analysis
of Prior GRS Legislation
The 1972 Act
The GRS grants authorized by the State and Local Fiscal Assistance Act of 1972
(the 1972 Act) were essentially unconditional. A trust fund was established and
annual appropriations were dedicated to the trust fund. Even though the grants were
identified at the time as general revenue sharing, the legislation did include a list of
“priority expenditures” for which the shared revenue sent to local governments could
be used. (The grants to states were unconditional.) GRS grants could be used by
local governments for the following acceptable operating expenditures: (1) public
safety; (2) environmental protection; (3) public transportation; (4) health; (5)
recreation; (6) libraries; (7) social services for the poor or aged; and (8) financial
administration. “Ordinary and necessary capital expenditures” were also allowed.24
The grants could not be used for education.
24 Section 103 of the “State and Local Fiscal Assistance Act of 1972.” State governments
usually maintain an operating budget and a capital budget. Generally, debt cannot be issued
for the operating budget.

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Note that the priority expenditure list was discontinued by the 1976 extension.
In addition to the priority expenditure list, the 1972 Act also disallowed the use of
GRS for matching federal grants. That restriction was also dropped in the 1976
extension.
Congress believed GRS was necessary for a variety of reasons. The most
prominent reason at the time was the perceived need for reallocation of government
responsibilities arising from the changing citizen demands for government services
(fiscal reallocation as cited earlier). The congressional sentiment behind the 1972
Act that created general revenue sharing is summarized well in the following passage
from the Senate report accompanying the 1972 Act:
Today, it is the States, and even more especially the local governments, which
bear the brunt of our more difficult domestic problems. The need for public
services has increased manyfold and their costs are soaring. At the same time,
State and local governments are having considerable difficulty in raising the
revenue necessary to meet these costs.25
The Nixon Administration seemed to have a similar perspective. When
President Nixon signed the legislation, the President remarked that the GRS program
would “... place responsibility for local functions under local control and provide
local governments with the authority and resources they need to serve their
communities effectively....”26
However, the shift in the demand for and provision of government services was
not the only justification for GRS. Observers at the time cited these additional
reasons for implementing a revenue sharing program:27
! to stabilize or reduce state and local taxes, particularly the property
tax;
! to decentralize government;
! to equalize fiscal conditions between rich and poor states and
localities; and
! to alter the nation’s overall tax system by placing greater reliance on
income taxation (predominantly federal) as opposed to property and
sales taxation.
Counteracting cyclical economic problems, such as state and local budget
deficits induced by a slowing economy, was not explicitly mentioned as justification
for GRS in the 1972 Act. However, when the debate began in 1974 on extending
25 U.S. Congress, Senate Conference Report, report to accompany H.R. 14370, S.Rept. 92-
1050, 92nd Cong. (Washington: GPO, 1972).
26 This quote is cited in the following: Graham W. Watt, “The Goals and Objectives of
General Revenue Sharing,” The Annals of the American Academy of Political and Social
Science, vol. 419, May 1975. Mr. Watt was Director of the Office of Revenue Sharing, U.S.
Department of the Treasury.
27 Richard P. Nathan, Allen D. Manvel, and Susannah E. Calkins, Monitoring Revenue
Sharing (Washington, D.C.: The Brookings Institution, 1975), p. 6.

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CRS-14
GRS beyond 1976, the countercyclical potential of revenue sharing apparently
became important to policymakers. The counter cyclical arguments were likely
initiated by the relatively severe recession that lasted from November 1973 through
March 1975.28
The 1976 Extension
The State and Local Fiscal Assistance Act of 1976 extended the GRS program
through FY1980 with minor modifications. In the Senate report accompanying the
legislation, Congress identified the following two reasons for the extension: (1)
“Rapidly rising services costs coupled with sluggish declining tax bases has meant
that State and local governments have had to raise tax rates and/or cut services,” and
(2) “A chronic problem State and local governments face is that the demand for
public services is more elastic than the availability of revenues to finance them.”29
The Senate report suggested that the extension of the GRS program “...not only
serves to help solve the fiscal problems of individual state and local governments, but
also serves to stabilize the economy.”
The 1976 extension also eliminated the priority expenditure categories for local
governments and the prohibition on states from using the grants for federal matching
grants. Policymakers recognized the fungibility of local revenues which initiated the
elimination of the spending restrictions. Although the fiscal stimulus features were
mentioned during the debate surrounding extension, the ultimate purpose of revenue
sharing was characterized as a long-term restructuring of the intergovernmental
transfers.
The desire to use revenue sharing as a countercyclical fiscal policy tool was not
directly addressed in the 1976 extension. However, the reference to revenue
sharing’s ability to “stabilize” the economy may have arisen due in part to the
countercyclical merits of GRS as suggested during the debate leading up to the
extension.30
The total size of the extension, $25.5 billion, was approximately 2.5% of total
state and local own-source tax revenue collected over the FY1977 to FY1980 period.
Nationally, the transfer averaged 0.29% of national gross domestic product (GDP)
annually over the four-year period.
28 For more, see Edmund Muskie, “Revenue Sharing and Countercyclical Assistance,” in
General Revenue Sharing and Decentralization, Walter F. Schefer, editor (Norman, OK:
University of Oklahoma Press, May, 1976), p. 67-74.
29 U.S. Congress, Senate Finance Committee, report to accompany H.R. 13367, S.Rept. 94-
1207, 94th Cong., Sept. 3, 1976. (Washington: GPO, 1976), p. 4.
30 Around the time the extension was passed, Congress did enact two relatively small
countercyclical assistance programs. P.L. 94-369 included an authorized maximum amount
of $1.375 billion for countercyclical assistance over five quarters, beginning July 1, 1976.
The funds would be released to state and local governments provided certain national
economic thresholds were crossed. P.L. 95-30 contained an extension of the countercyclical
aid program, authorizing a maximum of $1 billion for FY1977 and $2.25 billion for
FY1978. No federal funds were spent under either authorization.

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The 1980 Extension
The State and Local Fiscal Assistance Act Amendments of 1980 (P.L. 96-604)
extended the general revenue sharing program through September 30, 1983, but only
for local governments.31 According to the House report accompanying Act, the state
share was eliminated
... as a means of helping to balance the Federal budget. The Committee believes
that State governments are better able to adjust to the discontinuance of revenue
sharing allocations than local governments.32
Up until the 1980 Act, approximately one-third of the GRS grants had been allocated
to the states. The 1980 Act reduced the GRS grants by one-third — from $6.850
billion to $4.567 billion — and only local governments received the grants (see Table
1).
In addition to continuing GRS for local governments, the 1980 Act also
authorized the creation of a “countercyclical assistance program” to be triggered by
national economic downturns. The purpose of the program was to provide assistance
to state and local governments during recessions. To achieve this, the program
authorized $1 billion for each of the fiscal years, 1981, 1982, and 1983, subject to the
trigger mechanism described in the House report accompanying the legislation:
... funding would be triggered when the national economy has experienced
two consecutive quarterly declines in both real gross national product and
real wages and salaries [emphasis added] (that is, corrected for inflation). Once
a recession has been confirmed by these declines, funds would be provided for
each recession quarter in relation to the severity of the recession. The program
would be funded at a rate of $10 million for each one-tenth percentage point
decline in real wages and salaries measured from the pre-recession base — the
average of the real wages and salaries for the two quarters preceding the decline.
The amount of money allocated in any one quarter would be limited to $300
million.
After setting aside 1% of the funds for Puerto Rico, Guam, American Samoa,
and the Virgin Islands, the remaining funds would then be split evenly between state
governments and “county areas.” The relative size of payments to states and county
areas would have been based on the severity of the economic downturn in that area.
The state portion would be adjusted by the state’s tax effort. The greater the effort,
the greater the grant.
Apparently, the trigger threshold was never crossed. No grants were provided
under the countercyclical fiscal assistance program. Table 3 below reports the
quarterly change in the real wage and real GNP for the second quarter of 1980
31 The 1980 legislation did provide for GRS grants for states if the state reduced other
categorical federal grants-in-aid by an amount equal to the GRS grant. Essentially, states
had the option of changing categorical aid into general assistance.
32 U.S. Congress, House Government Operations Committee, Report to accompany H.R.
7112, H.Rept. 96-1277, 96th Cong., Sept. 4, 1980. (Washington: GPO, 1980), p. 6.

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CRS-16
through the third quarter of 1983. The time periods reported in Table 3 are the three
federal fiscal years for which funding was authorized plus the two quarters before the
first fiscal year of authorization. Note that for the 14-quarter time frame reported
below, there were never two consecutive quarters where both the real GNP and real
wage declined from the previous quarter.
Table 3. Change in Real GNP and Real Wages,
1980: Q2 to 1983:Q4
(Bold horizontal lines mark federal fiscal years.)
Period
Real GNP
Real Wage
1980: Q2
-2.11%
-1.30%
1980: Q3
-0.23%
1.00%
1980: Q4
1.53%
0.30%
1981: Q1
2.01%
-1.20%
1981: Q2
-0.75%
-0.20%
1981: Q3
1.24%
-1.10%
1981: Q4
-1.05%
0.20%
1982: Q1
-1.73%
-0.10%
1982: Q2
0.55%
-0.90%
1982: Q3
-0.67%
0.10%
1982: Q4
-0.03%
1.70%
1983: Q1
1.14%
-0.50%
1983: Q2
2.40%
1.20%
1983: Q3
1.78%
0.50%
Source: CRS calculations based on quarterly data from the U.S. Department
of Commerce, Bureau of Economic Analysis and the U.S. Department of
Labor, Bureau of Labor Statistics.
The 1980 Act is significant because the act discontinued revenue sharing for the
states and formally introduced the concept of providing countercyclical fiscal
assistance through federal grants to state and local governments as part of GRS
legislation. Ultimately, the countercyclical assistance program was never funded and
thus no countercyclical fiscal assistance was provided.
Local governments generated $593.8 billion of own source revenue over the
three fiscal years covered by the 1980 Act. GRS provided $13.7 billion in grants to
local governments — approximately 2.3% of total own-source revenue. The grants
to local governments probably had little effect on the national economy given they
represented 0.14% of U.S. GDP over the three-year time frame. The $1 billion for
each of 1981, 1982, and 1983 for countercyclical aid, authorized but never spent,
would have produced a negligible effect on the economy, even if fully realized.

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The 1983 Extension
The final installment of the GRS program was signed into law on November 30,
1983, as the Local Government Fiscal Amendments of 1983 (P.L. 98-185). As with
the 1980 Act, only local governments received grants. The 1983 extension was
intended to stabilize the fiscal condition of local governments. The conference report
accompanying the legislation stated that the
... tendency of State and Local governments to rely on relatively inelastic revenue
sources, such as local property taxes, has limited their flexibility in responding
to fiscal problems. To assist local governments in meeting the needs of their
communities in a time of fiscal stringency, the Committee amendment extends
the general revenue sharing program for three years.33
The final extension provided the same amount for local governments as did the 1980
Act ($13.7 billion) in three equal annual installments of $4.567 billion. This amount
was equal to the amount received by local governments from 1977 through 1980.
The countercyclical aid program was not extended. The GRS program ended
September 30, 1986.
33 U.S. Congress, Senate Finance Committee, report to accompany S. 1426, S.Rept. 98-189,
98th Cong., July 20, 1983. (Washington: GPO, 1983), p. 2.

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