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 looked to the bygone GRS program once before as an option designed to address the fiscal year 2003 (FY2003) and FY2004 state budget shortfalls ($21.5 billion and $72.2 billion, respectively). Some observers have suggested that a revenue sharing program that provided states with grants to forestall spending cuts and tax increases in 2009 may deter pro-cyclical actions by states and produce national fiscal stimulus. The budget gaps for is estimated to be $31.0 billion for the remainder of FY2009 and for FY2010 it is estimated to be $64.7 billion. 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 in 2009. 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. 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 2009 including estimated distribution to the states based on the original GRS formula. The Appendix provides a more detailed legislative history of the GRS program created by the 1972 Act and its three extensions. 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. 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 $313 billion (in 2008 dollars) 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 2008 dollars). The estimates provided in Table 1 for 2008 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 $5.08 commitment in 2008. 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. Note that after FY1980, only local governments, not states were entitled to GRS grants. GRS allocations were determined by a formula that used a combination of the following variables: tax effort, population, and per capita income. 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. More specifically, section 106 of the GRS legislation stipulates that under the three-part formula, each state shall receive: an amount which bears the same ratio to the amount appropriated under that section for that period as the amount allocable to that State under subsection (b) bears to the sum of the amounts allocable to all States under subsection (b) The three-factor formula can be summarized symbolically: State " i " Share of GRS = where: A us = total appropriation, = population of state " i ", = total personal income of state " i ", , or state " i " relative income factor, and , or state " i " general tax effort factor. The two ratios in the formula, the relative income factor (RIF) and the general tax effort factor (GTEF), were intended to adjust the state allocations based on the state's "ability-to-pay" and tax structure. The RIF for a state is the pre capita income for the U.S. divided by the per capita income of the state. If the state's RIF is greater than one, then it is considered relatively low income. Analogously, a RIF less than one indicates a state has relatively high income. In the three-part GRS formula, the higher a state's RIF, the greater the share of revenue. The GTEF was considered important for GRS because it created a disincentive for states to reduce taxes and rely more on the federal government for revenue over time. The GTEF is total state tax collections as a share of state personal income. In the GRS formula, the larger the GTEF component, the greater the share of revenue. Under the original GRS, 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. 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. 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." 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." Table 2 below employs the three-part formula to allocate a hypothetical appropriation of $40 billion and $20 billion using data for 2007, the latest year where data for the full years is available. Only states are eligible in the example provided in Table 2 . 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 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. 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 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 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. State and local governments tend to save less during expansions for a variety of reasons.