The United States today consists of "haves" and "have-nots." The "haves are the sunshine states, with population growth, natural resources, new industrial locations. The "have-nots" are the old industrial states of the Northeast and the Midwest. Decaying urban areas with shrinking tax bases face increasing needs to provide services to a population less and less able to pay for them. Racial tensions in the ghettos combine with increasing middle-class frustrations to create a potentially explosive mixture.
In recent years, a fragile equilibrium has been maintained: New York City, which had a close brush with bankruptcy in 1975, has since reduced its deficit from $2 billion to $400 million, reduced its work force drastically and refinanced $6 billion of short-term debt. Other northeastern and midwestern cities maintained reasonablle stability until the onset of the current round of inflation and recession. In the last year or so, Cleveland, Chicago, Buffalo, Philadelphia and Washington, D.C., have seen their fiscal equilibrium shattered and, as the recession deepens, with inflation still in double-digit ranges, they will be faced with widening budget gaps and greater and greater social strains. New York City, which by law must eliminate its deficit in the year beginning July 1, 1981, will have to cope with a significantly higher gap due to inflation and recession. To this is added the loss of revenues caused by federal cutbacks and industrial layoffs. In half the country, we have an environment of unrelieved misery.
The actions that these cities and states will take to close their deficits are both inevitable and counterproductive. They involve a combination of local tax increases combined with service cuts and layoffs; both have the effect of driving more taxpayers out and deepening the economic downturn in the cities. From the federal government's point of view, the effect is equally counterproductive. Local tax increases reduce federal revenues, since local taxes are deductible for federal income-tax purposes. Local layoffs increase transfer payments for unemployment. Deficits are increased; the recessionary cycle is deepened.
It is in this environment that we superimpose a new phenomenon: the skyrocketing revenues (mostly in the form of severance taxes and royalties) to be collected by the oil-producing states as a result of oil-price decontrol. The Northeast-Midwest Institute has recently published a study estimating that from 1980 to 1990 the states of Alaska, Texas, California, Louisiana, Wyoming, Oklahoma, New Mexico and Kansas will collect increased tax revenues amounting to $115 billion. Alaska will, on the average, increase its annual revenues $3.3 billion per annum, over 300 percent of its current annual expenditures. Texas will, on the average, increase its annual revenues by 90 percent of its current annual expenditures. Alaska just abolished its income tax and is paying cash dividends to its citizens. An attempt was made to subject these revenues to the windfall profits tax; it failed.
Ironically, revenues to these states from a variety of federal assistance programs such as revenue sharing would actually increase because of the definition of "tax effort" in grant distribution formulas. Thus, federal assistance will increase in areas of dramatically lesser needs, while it will be reduced in those areas where need is greatest.
Much has been made recently of budget surpluses at the state and local government level. But over 60 percnet of state surpluses in 1978 were concentrated in those eight states accruing more than 90 percent of revenue increases for oil decontrol over the decade. Like a domestic version of OPEC, the oil-producing states can use their vast revenues to lower other taxes, increase services, attract industry by almost unlimited means; their economies as well as the economies of surrounding states will get significant boosts.
And, like a domestic version of the Third World, the Northeast and Midwest, importers of fuel, needy for additional federal assistance will bear the burden since, after all, this is a zero sum game. It is really not very difficult to see where this inevitably leads. Half the country nearly bankrupt, many of its major cities pools of unemployment and unrest, and the other half swimming in oil, industry and wealth. This is not the stuff of a stable democracy; it is not the stuff of a union of states. For a union to survive there must be a sense that both burdens and benefits are shared on equitable basis.
If we wait for the crisis, as we did with OPEC and the Third World, it will be too late. A short-range and long-range program should be examined by the president and the Congress to remedy this situation. It should include:
For the short run, an institution modeled after the Reconstruction Finance Corporation of the 1930s to provide low-cost, long-term financing to permit those localities in difficulties to weather the next few years.
Federal formulas for assistance programs to be modified to provide money where it will be most needed, as suggested, for instance, in Sen. Daniel P. Moynihan's bill to revise the Medicaid matching formula.
For the long run, new permanent revenues must be funneled to the Northeast and Midwest, in the form of direct federal budgetary assistance and incentives for private industry to remain and grow. A possible source of revenue could be created by dedicating a portion of a national gas tax for that purpose.
The solution to this problem is as complex as it is vital. It clearly does not lie in letting market forces work their will since they will only exacerbate the situation. Neither is it in counting on the current recession, which will only force local actions, making matters worse, both for the cities and for the country. Urban America must be a fit place for middle-class people to live, work and bring up their children. A business-labor-government partnerhsip much reach into the ghettos to provide employment and opportunity; a black or Puerto Rican youngster in Bedford-Stuyvesant should know that, if he stays in school and out of trouble, he will have a job. There is clearly more than enough to be done. Over the next decade, massive investments must be made in mass transit, in retooling the automobile industry, in improving our railroad system, in financing a domestic energy program. It is unthinkable that we cannot find a way for the entire country to share in this activity.
In a worldwide war of ideologies and ideas, it will be difficult to claim the virtues of our system if Philadelphia, Washington, New York and Chicago are turned into slums. None of this is easy, but there is still time. Five years from now it will be too late. This country will soon be called upon to participate in major international financial effort to help the Third World, either through increased commitments to the World Bank, the International Monetary Fund or other similar institutions. It is an effort that will have to be made. However, on our scale of priorities, our own Third World should come first.