creased by only 5.2 percent. Largely because of the lower growth in the Federal payment, total revenues increased at an average annual rate of 8.7 percent.

We did an analysis of the forecasts of revenue growth which the city itself has done. These forecasts of revenue growth over the next 5 years suggest that the rate of increase will be lower than it has been in recent years. This reflects the expectation for more moderate economic growth following the period of rapid recovery from the 1982 recession. The overall growth rate for total revenues is forecast at 5.9 percent annually over the next 5 years. As in the past, the three largest contributors-income taxes, property taxes, and sales taxes-are expected to grow faster than the average rate. The collective growth rate of all tax revenues is forecast at just over 72 percent for the next 5 years.

The obvious retarding effect on the growth of total lies in the projected decline in contributions from Federal sources. The latter's contributions to total revenues are forecast to decline, from just over 20 percent in fiscal year 1986, to just over 14 percent in 1991.

By the way, that forecast assumes the Federal payment will continue at about $425 million a year. We know that under GrammRudman there was a reduction in the fiscal year just concluded.

If the District of Columbia were to become a State, it could consider the imposition of taxes on the District earnings of all nonresidents. If such a tax had been in effect, it would have yielded nearly $500 million in calendar year 1986. However, it is more realistic to assume that such a commuter tax would not apply to nonresidents working for the Federal Government. In the legislation we looked at, the Federal enclave would be taken out of the State of New Columbia, and a large fraction of the commuters would continue to work for the Federal Government.

Assuming that a commuter tax would be imposed only on nonresident earnings in the private sector, the potential additions to District revenue would have been about $290 million in 1986, and it would rise to about $356 million in 1990. These estimates indicate that, with no change in the D.C. tax rates, and with the addition of a commuter tax on private sector earnings, total revenue from the income tax would rise from about $400 million which were collected in 1984 to about $800 million in 1988, and $880 million in 1990. In other words, it would make a substantial addition to District

revenues.

Now, the Federal payment does pose some rather interesting questions. We know that from the earliest days of the Republic there has been a claim recognized by the Federal Government with respect to the fiscal imposition made on the District of Columbia. In our report we summarize the record compiled by a number of investigators with respect to the relationship between the District and the Federal Government, with respect to the origin and magnitude of the Federal payment. I won't go into these in any detail, but let me look at the impact which a number of alternative ways of calculating the Federal Government would have.

Now, a number of suggestions have been made to put the Federal payment on a systematic basis. It is not on a systematic basis today. There was a time when, maybe for 50 years, when it was on

a systematic basis, but it hasn't been for a number of years now. Most of the arguments favoring a formula-based Federal payment would relate it to the District's local revenue. In recent years, the Federal payment revenues have declined steadily, from 20.6 percent of such revenues in fiscal 1982, to 18 percent in fiscal year 1986. It has been forecast by the District of Columbia government to decline to 14 percent in fiscal 1991. The District has projected an annual payment of $425 million through fiscal 1991, but it would be more reasonable to set it at a fixed percentage of revenue raised locally by the District.

If the Federal payment were to equal 25 percent of local revenues, there would be a modest improvement over the $425 million projected by the District. However, it would require a 30-percent ratio of Federal payment to local revenue to effect a sizeable increase over the District's forecast.

The rationale used to support the Federal payment to the District could be used effectively to justify continuation of the payment if the District of Columbia were to become a State.

As I indicated earlier, Mr. Chairman, we also investigated the extent to which statehood would change the District of Columbia's access to Federal programs, which currently provide a significant amount of funding. The examination of the status of Federal programs as a result of statehood was based on a review of each of the District of Columbia's agencies' proposed budget for fiscal year 1987. The analysis was limited primarily to the four agencies receiving the highest level of revenue from the Federal Government. In addition, several other agency programs for which budget requests exceeded half-a-million dollars were reviewed. For each program, the review determined the authority under which it was funded, the public applicants eligible for the program-and/or local governments-and, in some cases, the formula and matching requirements.

The key conclusion-all of the details are in the study and I won't go into them. But the key conclusion reached from the comprehensive examination of the District of Columbia's reliance on Federal programs stands out-if the District were to become a State, it would neither gain nor lose any significant level of Federal funds.

Currently, the District of Columbia receives Federal funding as follows: Where funding is available to local governments only, the District is funded as a local government; where funding is available to State governments only, the District is designated by the statute or regulations to receive Federal funds along with the 50 States and U.S. territories, or it is treated as if it were a State; where Federal funding is available to State and local governments, or to local governments through the State, generally the District is treated as a State.

Now, it is a complicated matrix. But basically what it says is that currently the District gets its share of the programs.

One District of Columbia agency receiving major funding from the Federal Government is the D.C._Department of Housing and Community Development. One of its Federal revenue sources is the section 8, Lower Income Housing Assistance Program. Statehood would not affect the funding from that revenue source because

both State and local governments are eligible public applicants. The Community Development Block Grant Program is one of the few major Federal revenue sources where the District is funded as a local government.

In fiscal year 1986, $19.5 million was provided through a formula grant available to entitlement cities. If the District were to become a State, the U.S. Department of Housing and Urban Development could fund the State under the Community Block Grant Program for States, or it could continue to treat the District as if it were a city. In any event, it is unlikely that the funding level would change as a result of statehood.

Major revenue sources for the Department of Employment Services are the Job Training Partnership Act Programs funded at the $19.5 million level in fiscal 1986. Under those programs, the District is being treated as a State. The same is the case under the unemployment insurance program.

The board of education in the District receives major Federal funding. A series of programs is funded under the authority of the Education Consolidation and Improvement Act of 1981. The District is now funded as if it were a State. The Impact Aid Program is available to local educational agencies. If the District were to become a State, it should not affect this program which bases funding on the extent to which the area's revenue is adversely affected by Federal activities. Certainly the District is adversely affected.

Also, statehood is not expected to affect the funding from other sources, such as the Vocational Education Program, the Bilingual Education Program, and the Education of the Handicapped Program. In fiscal year 1986, the District received $14.5 million under the School Lunch and School Breakfast Programs. The U.S. Department of Agriculture treats the District as if it were a State.

The District of Columbia's Department of Human Services receives a large amount of Federal funds. The Medicaid Program is funded at $166 million in fiscal year 1986. Eligible applicants under the program are State and local welfare agencies operating under an approved Medicaid State plan. Given the nature of the program, statehood is not expected to have an adverse impact on the amount of funds received. The Aid to Families with Dependent Children Program, and the Women, Infants and Children Program, are available to State and local governments.

On balance, then, Mr. Chairman, the Federal funding of District of Columbia programs is not expected to be affected negatively by statehood.

Thank you very much, Mr. Chairman.

[The prepared statement of Andrew Brimmer follows:]

FISCAL PROSPECTS FOR THE STATE OF NEW COLUMBIA

Testimony
By

Andrew F. Brimmer*

I am pleased to appear before the Subcommittee on Fiscal Affairs and Health of the Committee on the District of Columbia. My Testimony will consist primarily of a summary of findings from a study conducted by Brimmer & Company which focused on "Fiscal Prospects For The State of New Columbia." The study was prepared for the District of Columbia Statehood/Compact Commissions.

The study concluded that Statehood for the District of Columbia would bring about significant changes in the political status and the manner of operation of its government. However, advantages associated with its new status as a state and changes in its jurisdictional

* Dr. Brimmer is President of Brimmer & Company, Inc., a Washington, D.C.-based economic and financial consulting firm. He is also a Former Member of the Board of Governors of the Federal Reserve System.