Restart federal revenue sharing to address COVID-19

One Republican president signed federal revenue sharing into law in 1972; another Republican president ended it in 1986. It is time for a third Republican president to restart it, as states and local communities struggle with the effects of the COVID-19 pandemic.

In 1972, President Nixon signed the State and Local Fiscal Assistance Act, commonly known as federal revenue sharing, with great fanfare at Independence Hall in Philadelphia. Under his banner of New Federalism, the federal government would collect taxes and share a portion of them with state and local governments. 

The initiative was a great success, bringing more than $80 billion in much-needed federal aid to 39,000 state and local jurisdictions. One-third of the funds went to states; two-thirds to local governments. Spending was audited, but state and local governments determined how the money was spent.

In 1986, under President Reagan, federal revenue sharing expired. It was a victim of increasing federal deficits and a preference for encouraging smaller government through state and local competition to lower their taxes to attract investment. 

It is time to bring revenue sharing back as a way of helping state and local governments deal with the effects of COVID-19. Those effects relate to both the revenues and expenses of state and local governments. Revenues are down because of the impact of COVID-19 on economic activity. Expenses are up, not only to provide support to individuals suffering economic distress but also to shore up the medical response to the virus.

Revenue sharing is a good way to address the shortfall from state and local taxes, while additional categorical aid — tied to specific needs — is a good way to address the coronavirus-related expenses of state and local governments. Both forms of assistance are needed, because replacing lost revenue is a different need than subsidizing COVID-19 expenses. Doing only one or the other would leave the needs of states and localities only half-addressed.  

Revenue sharing is easy to administer and has little overhead. If it is allocated under population-driven formulas that account for the degree of revenue shortfall being experienced, all states and localities would benefit equitably. In today’s dollars, the funding provided under the old program would translate to approximately $300 billion in revenue replacement support.

Another advantage of revenue sharing is that federal taxing power can be used to pay some or all of the costs. In particular, the revenue to be shared can be raised by making the federal income tax structure more progressive. Increased progressivity is warranted, given the extent of income inequality and the impact of that inequality on the hardship brought about by the virus.  

Increasing the progressivity of taxes is difficult for states and localities, because wealthier taxpayers could choose to relocate to another state or locality to avoid the increase. If federal taxes are made more progressive, the increased taxes can be avoided only by moving to another country — a less likely scenario.   

Politically, revenue sharing can even avoid the charge of raising taxes on high-income taxpayers, because it can be funded by borrowing or by printing more money without taxes rising. Either way, it would be extremely popular with state and local governments and would not require a big bureaucracy. Both red and blue states would benefit; all have lost revenue.  

In addition, tax increases impacting high-income taxpayers are on the table for the 2020 election. Under former vice president Joe Biden’s plan, they would be used for big social programs. Therefore, using increased tax progressivity for COVID-19 relief should be more palatable to conservatives.  

The oft-repeated phrase “We’re all in this together” goes to the essence of federalism, where the federal government is a boon and not a hindrance to state and local governments. Enacting a new revenue sharing program would be a fine example of a return to that spirit.

Evan A. Davis, an attorney, is a former counsel to New York Gov. Mario Cuomo and was president of the New York City Bar Association (2000-2002).