exas I ­ BUSINESS The Bureau of Business Research • ev1e1111 The University of Texas at Austin 209 Planning for Federal Cutbacks in Texas Susan A. MacManus 215 The New Federalism and State Tax Efforts Charles G. Leathers 220 The Changing Politics of Oil James E. Anderson 224 Petrochemicals and Pollution in Texas and Louisiana Keith Chapman 229 Devaluation and Merchandising in Texas Border Cities Donald W. Baerresen 232 Usury Laws in Texas: An Economic Analysis William R. Reichenstein 236 Characteristics of Successful and Unsuccessful Entrepreneurs Donald L. Sexton and Philip Van Auken 240 The Status of Small Business in San Antonio Jude Valdez 245 Recent Trends in Mexico's Fishing Industry: Implications for the United States C Richard Bath 249 Developing a Neighborhood Commercial Revitalization Plan Bruce W. McClendon September-October 1982 . Texas Business Review reports the results of research in business the s · 1 sciences, and .th~ physical sciences in language that is readily unde;stand~~:~. Our readership includes policy makers in government members of the b ·. . . . ' UD ness community, university faculty, and the general public. Articles focus on topics of special interest to readers both in Texas and throughout .the Southw~st and South. These topics include energy, inflation, ma~ufactun~g, population, labor, public policy, transportation, the small business, regional economic development, and other related areas . .B~cause Texas B_usine.ss Review encourages a free exchange of ideas, op~mons expressed i~ articles are those of individual authors and not neces­sanly those of the editors or the Bureau of Business Research. Texas BUSINESS The Bureau of Business Research • ev1ew The University of Texas at Austin Vol. 56, No. 5 September-October 1982 Bureau of Business Research Victor L. Arnold, Director Review Staff Joseph E. Pluta, Editor Lois Glenn, Publications Manager Charles F. Dameron, Jr., Managing Editor Mary Jo Powell, Editorial Assistant Mildred Anderson, Data Compilation Jean Stenger, Computer Graphics Robert T. Jenkins, Production Assistant Joan F. Dameron, Compositor Meade E. Collard, Compositor Editorial Advisory Board Vernon M. Briggs, Jr. Cornell University George G. Daly University of Houston John F. Due University ofIllinois Peter C. Frederiksen Naval Postgraduate School Malcolm Gillis Harvard University Robert W. Gilmer Tennessee· Valley Authority John Stuart Hall Arizona State University Jared E. Hazleton University of Washington William H. Leahy University ofNotre Dame Charles G. Leathers University ofAlabama Edward J. Malecki University of Oklahoma Charles E. McLure Stanford University Edward M. Miller Rice University Jerome Olson University of Texas at Austin Thomas R. Plaut University of Texas at Austin James P. 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Planning for Federal Cutbacks in Texas The state of Texas began its 1982 fiscal year on Septem­ber 1, 1981, with a net cash balance of $2,860,212,779.1 The budget had been passed by the state legislature in May 1981-well in advance of congressional passage of the Bud­get Reconciliation Act of 1981, which cut federal funding levels and created nine block grants.2 Because the Texas legislature meets biennially, it passed the budget for fiscal year 1983 at the same time it passed the budget for fiscal year 1982. Thus, the two budgets were based on revenue and expenditure estimates made by state agencies as early as July 1980. The large state surplus and the biennial bud­get made planning for federal cutbacks and block grants somewhat unusual in Texas, as compared to other states. Traditional Assumptions Outsiders looking at states with large budget surpluses and biennial budgets, most of which are in the Sunbelt, often assume that in planning for federal cutbacks and block grants these states can use their budget surpluses to replace cut federal funds; that state capacity to plan for, or predict, drastic changes in federal fiscal policy is limited when the legislature meets biennially; and that in determin­ing how to administer cuts and block grants, states will choose efficiency strategies (often regressive) rather than equity (redistributive) strategies. How accurate are these assumptions? .Susan A. MacManus is Associate Professor ofPolitical Science, Uni­versity of Houston. This research is based on the author's participa­tion in the Field Network Evaluation Study ofthe Reagan Domestic Program, which is currently being conducted by the Princeton Ur­ban and Regional Research Center and funded by the Ford Founda­ tion. Susan A. MacManus In Texas, at least, there is no definite evidence that the state government could not plan for federal budget cut­backs and the institution of block grants in fiscal year 1982, despite the biennial nature of the budget. Short-term planning can enable state officials to cope with budget cuts, but the administration of cuts is frequently not a clear de­cision between efficiency and equity. Constraints on Using the Budget Surplus to Replace Lost Federal Funds Lost federal funds cannot easily be replaced by state surplus funds in Texas for several reasons, including the nature of the surplus itself, constitutional and statutory constraints, procedural constraints, and political constraints (see table 1 ). The Nature of the Surplus The year-end cash balance, or surplus, is often incorrect­ly viewed as available for spending, but spending of the sur­plus is limited because several revenue sources cannot be used for general spending (for example, interest and divi­dend earnings of the teacher and employee retirement ac­counts, the state and employee contributions to these pro­grams, and the endowed oil and gas royalty income of the permanent school and university funds) , and others may have previous contractual commitments or claims from existing spending authorities. The state operates on a cash accounting system, which means these obligations are not recorded until payments are made.3 The state's real surplus is rarely calculated or reported. It can be calculated only when the biennium ends and is, therefore, the cash balance, as of August 31 of each odd- SEPTEMBER-OCTOBER 1982 numbered year, minus encumbered and dedicated funds (the latter category includes funds for education, highways, and parks).4 Several different statistical approaches can be used to produce figures on the cash balance. Legal Constraints on the Use of the Surplus A number of constitutional and statutory constraints al­ready in effect before the adoption of the fiscal year 1982 federal budget cuts make it virtually impossible to use the state's surplus funds to replace federal cutbacks. In its Gen­eral Appropriation Bill for fiscal years 1982 and 1983 (passed in May 1981 ), the Texas legislature specifically pro­hibited use of state funds to finance federal shortfalls, ab­sorption of federally funded personnel positions, and parti­cipation in new federal programs. The statutory requirement limiting participation in new federal programs greatly restricts the state's participation in federal block grant programs implemented in the 1982 fis­cal year. Texas could not opt into three federal block grants -the Community Services Block Grant, the Community Development Block Grant, and the Primary Care Block Grant-because of statutory prohibitions against operating a program not previously authorized or appropriated. Related to these legal constraints are a number of procedural con­straints that effectively limit the ability of the state to use surplus monies to replace lost federal funds. Procedural Constraints The need to estimate revenues three years before ex­penditures, the appropriations function of the legislature, and conservative budgeting are examples of procedural con­straints (even though some are technically legal con­straints). These constraints prohibited use of the state's sur­plus to restore the projected $588 million reduction of fed­eral funds in fiscal year 1982 and made planning for cuts difficult. Estimating Revenues. In January of the off-legislative year the state comptroller's staff first estimates revenue, using national and state econometric models. Independent esti­mates are also developed by the Legislative Budget Board and the Governor's Office of Budget and Planning. These estimates are updated throughout the budgetary process. In the end, the state comptroller must supply the official rev­enue estimate to the legislature; the projected state expen­diture cannot exceed this revenue estimate. This estimate has two components: the anticipated end­of-the-biennium unexpended balance in the treasury and estimates of state revenues for the following biennium. In other words, the unexpended balance (erroneously referred to as a surplus) immediately becomes a part of the comp­troller's projections of revenues available for spending by the legislature when it meets in regular session two years later. (Official revenue estimates for fiscal years 1982 and 1983 were submitted to the governor and the legislature at the beginning of January 1981.) Federal funds have traditionally been substantially un­derestimated. As a consequence, the national adoption of budget cuts meant that federal revenues in Texas' fiscal year 198 2 will more closely approximate the state's actual revenues from the federal government. In some cases actual federal revenues will fall below the budgeted federal reve­nues. State surplus funds cannot be used to make up the differences created by this fiscally conservative estimating procedure because of the legal restrictions cited earlier. The alternative to restoring the cuts is a special session of the legislature, since the appropriations function belongs to the legislature-not the governor or the boards of state agen­cies-but special sessions cost $2.5 million to $3 million, which makes them politically unpopular. 5 Estimating Expenditures. Budgeting for a biennium involves three-year forecasts of state revenues and expenditures. Es­timates of expenditures during the next biennium are made in January and February of the first year of the current bi­ennium. (For example, budget preparation for the 1984 and 1985 biennium began in January of 1982.) By early summer these estimates are submitted to the Legislative Budget Board, which then holds extensive hearings on an agency-by-agency basis and submits a recommended budget to the legislature when it convenes in January of the odd­numbered year. Table 1 Factors Affecting Planning for Federal Cutbacks and Block Grants in Texas, Fiscal Year 1982 Constitutional and statutory constraints • Statutory prohibition against using state funds lo fund federal shortfalls • Constitutional ceiling on public assistance payments ($80 million) • Statutory limitations on transferring funds between lines • Statutory prohibition against state partici­pation in new federal programs (passed May 1981) • Statutory mandate that state portions of federal grant matches be reduced by same percentage as federal reductions • Biennial legislative sessions Procedural constraints • Budgets for fiscal years 1982 and 1983 were passed in May 1981, before federal budget cuts and block grants were made final • Biennial budget necessitates revenue esti­mates and expenditure estimates three years before actual expenditures • Legislature retains the power to shift funds from major categories and gover­nor has little budgetary power • Conservative fiscal policies, such as under­estimating federal funds Political constraints • General public support for Reaganomics • Public disapproval of the welfare state • Strong Republican governor • Strong local government support for state (as opposed to federal) control of funds • Popularization of the notion that Texas is shortchanged in federal formulas and subsidizes "irresponsible" states Political Constraints Political constraints by themselves (without legal or pro­cedural constraints) probably keep the state from using its surplus funds to cover lost federal funds since Reaganomics and its principles of limited government remain popular in Texas. Public disapproval of the welfare state is still strong, and the majority of the populace continues to believe that Texas has always been shortchanged in federal grant distri­butional formulas and, therefore, should limit its participa­tion in federal programs. In February 1982, when President Ronald Reagan's pop­ularity was dropping nationally, registered voters in Texas continued to give Reagan a reasonably high job rating: 58 percent approved of the job the president was doing and only 38 percent disapproved. 6 The state's governor remains one of President Reagan's ·staunchest supporters. A major­ity of the state's citizens share the governor's opinion that federal funds, especially public assistance funds, should be cut. They also believe that less government is better than more government, that with good management more can actually be done with less, and that dollar cuts do not have to mean an equivalent cut in services if administrative fat is removed and inefficiencies are eliminated. Recent statistics compiled by the Tax Foundation, Inc., show Texas as "the state most shortchanged by federal aid allocations"7 and the state that "pays more tax dollars and receives fewer grants-in-aid in return than citizens of any other state."8 Such statistics, which are updated and widely publicized annually, do little to promote support for restor­ing federal budget cuts. (Ironically, in view of the real cost of each dollar of federal aid to Texas, the state's taxpayers may be better off overall under Reagan's austerity program in fiscal year 1982 if planned tax cuts are implemented.) Even without these legal, procedural, or political con­straints, the need to use surplus state funds to cover federal fund shortfalls is less urgent in Texas than in most other states. Overall, Texas will have the lowest per capita loss of any state from the Reagan administration's 1982 federal budget cuts. A recent study by the Public Employee De­partment of the AFL-CIO concludes that Texas will lose an average of $56.86 for each resident, while the average na­tional loss will be $79.26 a person.9 These cuts, however, are not uniform in their effects on various programs. The state is projected to lose more than the average in two pro­grams: highways and child nutrition. Losses in Aid to Fami­lies with Dependent Children (AFDC), employment pro­grams (such as the Comprehensive Employment and Train­ing Act-CETA), and Medicaid are expected to be below average. Ironically, highways and child nutrition are the two programs that would probably have been funded from surplus monies or from transfers within administering de­partments had state agency executives been able to do so. The State's Capacity to Plan for Cutbacks and Block Grants Because the legislature adopted the state's budget months in advance of congressional passage of the Budget Reconciliation Act of 1981, Texas offers the perfect test of Table 2 Changes in Federal Revenue Projections for Texas, Fiscal Year 1982 Projected May 1981 t Projected January 1982 :j: (before Budget (after Budget Percentage change in Reconciliation Act) Reconciliation Act) projections for fiscal year Recipient agency• (in dollars) (in dollars) 19 82 federal funds Air Control Board 2,193,948 3,988,000 81.8 Commission on Alcoholism .. 3,328,797 3,900,000 17.2 Commission for Blind 14,367,008 10,757,931 -25.1 Department of Community Affairs.. 85,848,344 42,476,570 -50.5 Coordinating Board 1,856,178 n.a. Education Agency•• 642,627,691 629,235,349 -2.1 Employment Commission 117,795,549 84,816,939 -72.0 Governor's Office 11,322,593 10,476,129 -7.5 Health Department .. 88,027,034 n.a. Department of Highways and Transportation 456,193,017 471,418,017 17.3 Department of Human Resources 1,040,398,143 1,021,320,749 -1.8 Library and Archives Commission 3,465,292 3,680,000 6.2 Mental Health and Mental Retardation 7,448,587 14,959,364 100.8 Parks and Wildlife Commission 10,320,222 1,667,354 -83.8 Department of Public Safety 4,741,268 n.a. Railroad Commission 2,317,536 2,312,000 -0.2 Texas Energy and Natural Resources Advisory Council 437,159 1,976,354 352. 1 Department of Water Resources 9,861,970 16,582,755 68.2 Rehabilitation Commission 69,759,497 45,845,729 -34.3 Total 2,572,309,833 2,365,413,240 - 8.0tt n.a.: not available. • These agencies receive 97 percent of all the state government's federal funds. tState budget (General Appropriations Bill) for 1982-1983 fiscal years. tLegislative Budget Board, Program Evaluation Unit, "Agency Assessments of Federal Funds Reductions and Summaries," January 15, 1982, p. 3. ••Agency administers a block grant. ttFigures are understated because of missing data. SEPTEMBER-OCTOBER 1982 the traditional assumption that states with biennial budgets do not have the capacity to predict, or plan for, dramatic changes in federal fiscal policy. The state's revenue fore­casters relied upon estimates provided by the Washington­based Texas Office of State-Federal Relations, which based its estimates on the president's state-of-the-union and budget messages and figures in Budget Director David Stockman's "black book." At the time the state budget was adopted, there was little evidence to suggest that Reagan would actually get these cuts adopted. In many areas, the estimates were off considerably, but the state received considerably more federal funding than had been anticipated for programs administered by the Air Control Board, Mental Health and Mental Retardation De­partment, Texas Energy and Natural Resources Advisory Council, and the Department of Water Resources (see table 2).10 This result is consistent with the traditional pattern of agencies' receiving more in federal funds than was projected for them in the appropriation bill. In contrast, federal fund projections were greatly underestimated for programs ad­ministered by the Commission for the Blind, Department of Community Affairs, Texas Employment Commission, Parks and Wildlife Commission, and the Rehabilitation Commis­sion. The state missed about as many estimates as it got right, although in the aggregate its predictions were off only about 8 percent. 11 Planning for changes in federal fiscal policy, however, is not limited to estimating federal re­ceipts. Anticipating the unpredictable nature of congressional response to the president's budget-cutting and block grant proposals (and the soft nature of federal fund estimates by the state's budgetary experts), the legislature and the gov­ernor developed plans to deal with unanticipated federal fiscal policy changes (see table 3). Initial plans proposed by the legislature included two constitutional amendments: one to create a state finance management committee to handle budgetary matters between legislative sessions and another to raise the ceiling on public assistance payments (now set at $80 million). The governor's initial response was to plan for a special session of the legislature to imple­ment block grants should they be passed and to submit a list of bothersome, costly federal regulations to the Presi­dent's Task Force on Regulatory Relief (headed by Vice­President George Bush-a Texan) in hopes of reducing regu­latory costs. Texas voters overwhelmingly defeated the legislature's proposed constitutional amendment to create a state fi­nance management committee. Proponents of the finance committee had argued that a special session would be need­ed to implement federal block grants should the amend­ment be defeated. 12 In fact, the legislature wrote into the appropriations act itself a provision that authorized the state finance management committee to allocate to state agencies new federal block grants reviewed by the state in the interim before the next regular session of the legislature (January 1983 ). Article V, Section 18 of the current appro­priations act states, "Should an amendment to the Texas Constitution be adopted creating a State Finance Manage­ment Committee, the funds on deposit in the account es­tablished [for block grant funds] are appropriated subject to the management of the State Finance Management Com­mittee." By the time the block grants were passed, how- Table 3 Texas' Handling of Federal Budget Cuts and Block Grants in Fiscal Year 1982 Initial approaches Approaches during fiscal year 1982 Long-term plans (February-May 1981)• (October 1981-September 1982) (fiscal year 1983 and beyond) • Preparing estimates of level of cuts by Texas Office of Federal-State Relations (Washington), Legislative Budget Board, Comptroller, Governor's Office of Bud­get and Planning • Planning for a special session of the legis­lature (never held) • Proposing a constitutional amendment to create a state finance management com­mittee to handle budgetary matters be­tween legislative sessions (defeated by Texas voters) • Proposing constitutional amendment to raise the ceiling on public assistance payments passed by legislature (on ballot November 1982) • Submitting a list of "bothersome" federal regulations to the President's Task Force on Regulatory Relief (headed by Vice-President George Bush) • Implementing better management prin­ciples in state agencies (doing more with less) • Reducing administrative personnel corps by eliminating positions and by attrition • Requiring local governments and non­profit and private subcontractors to put up more matching money • Mandating local government reorganiza­tion and program consolidation • Changing eligibility standards • Reducing the number of subcontractors to save on administrative costs • Holding regional hearings across the state to reset agency priorities • Adopting pro rata or across-the-board cuts to minimize conflict and to main­tain the intent of the legislature • Pressuring friends of Texas in Washington to reinstate cuts in capital project monies, tapping the state's direct pipe­line to the White House • Updating estimated cuts periodically • Reducing services no longer deemed essential or efficient • Holding interim legislative committee hearings • Diversifying revenue (in anticipation of a drop in natural resource base) • Pressuring for changes in formulas for distribution of federal funds • Establishing contingency funds in the bud­get to cover unpredictable cuts between sessions • Selling bonds • Earmarking more tax monies for capital projects • Creating regional authorities and special districts funded by sales or user taxes • Adopting indexing mechanisms • Phasing out inefficient programs through cost-benefit analysis by state agencies • Improving intergovernmental cooperation in large metropolitan areas • Shifting from new construction to main­tenance strategies for capital projects • Strengthening the public-private partner­ship and increasing private-sector giving for social services • Eliminating burdensome rules, regulations, paperwork, and administrative activities •The Texas legislature adjourned in May 1981, before the fiscal year 1982 budget recisions and the implementation of federal block grants. It does not meet again until January 1983. TEXAS BUSINESS REVIEW ever, their form was such that neither the governor nor leg­islative leaders believed there was any need for a special ses­sion. In August 1981, Governor William P. Clements, Jr., said, "It seems this boogie bear that was going to present such a problem (in state budgeting) has pretty well dis­appeared. I think a special session with respect to categori­cal grants has now diminished if not disappeared." 13 The proposed constitutional amendment to raise the ceiling on public assistance payments from $80 million to 1 percent of the state's budget (around $270 million in the current fiscal year 1982-1983 biennium) will be voted on by Texans in November 1982. Even if the amendment is passed, and few think it will be, the ceiling probably will not be high enough to cover the state's welfare spending in fiscal year 1983 or fiscal year 1984 if President Reagan's recent swap proposal (state assumption of total fiscal res­ponsibilities for AFDC) goes through Congress. 14 State Capacity to React to Budget Cuts in the Postlegislative Period State planning for coping with federal cuts does not stop with the end of the legislative session. Planning is ongoing­if for no other reason than the constantly changing picture at the federal level. Short-Term Planning. Data gathering (in federal fiscal year 1982) includes periodic updates of estimated cuts by the Texas Office of Federal-State Relations, the Legislative Budget Board, the Governor's Office of Budget and Plan­ning, and the Comptroller of Public Accounts; regional hearings across the state to reset agency priorities; and in­terim legislative committee hearings. Other short-term plan­ning activities are based on better management principles. Reorganization and consolidation of programs, reduction in administrative personnel, reduction in the number of sub­contractors, stricter initial requirements for subcontracting with local governments and agencies are examples of such activities undertaken to offset federal fund cuts. The state has also successfully tapped its direct pipeline to the White House to reinstate cuts in capital project monies (especially in water and transportation). Longer-Term Planning. The state is also involved in a num­ber of other plans, many of which will be submitted in some form to the legislature in 1983. A number of propos­als for revenue diversification are already on the drawing boards. In its preliminary report the Texas 2000 Commis­sion (a long-range planning committee) notes that long­range planning for government finances is full of uncertain­ty and states that "the economic development of the State will be increasingly dependent on its ability to diversify its economic base as its reliance on its natural resource base de­clines." 15 Oil and gas production has been declining since 1972 (only prices have kept the percentages of revenue pro­duced by oil and gas severance taxes steady). Examples of recommendations for how the state's revenue structure should be altered are numerous. The Texas Department of Highways and Public Transportation has proposed the formation of regional transportation authorities, capable of generating revenue through sales taxes, and the contin­ued use of tollways. Increased taxes on gasoline and auto parts have also been recommended. The head of the highways department has also recom­mended revamping the formula used by the federal govern­ment to distribute highway fund monies since Texas gets back only 71 percent of what it pays in. 16 The Texas De­partment of Human Resources also wants federal distribu­tion formulas changed. One human resources official criti­cized the fact that Title XX monies for fiscal year 1982 were allocated on the basis of the state's estimated 1979 population and not the 1980 federal census-a distribution plan that cost the state $5 million. 17 (Title XX is the social services block grant, which funds activities in the areas of child protective services, community care to aged and dis­abled adults, and family self-support, including employ­ment, child day care, and family planning.) Other long-term plans for dealing with federal cutbacks include proposals to sell bonds (some $79.5 million can be raised by selling bonds for the state's own student loan pro­gram), shift from new construction to maintenance strate­gies for capital projects (the highway department plans to maintain and upgrade safety on existing state roads instead of adding to the state's 72,000 miles of major thorough­fares), improve intergovernmental cooperation in large metropolitan areas, strengthen the public-private partner­ship through formation of such planning commissions as the Texas 2000 Commission, and eliminate riders in appro­priations bills that have the potential to restrict the state's ability to react to economic fluctuations between legislative sessions. 18 Texas officials have always been skeptical of the stability of federal aid to the states. In the words of one Texas legis­lator (a Democrat), legislators have always had "a long-term fear that the federal government would withdraw its sup­port, as it's now doing, and that the state would be left holding the bag. " 19 The state's reliance on federal assis­tance (federal funds as a percentage of all revenues) de­clined from 29.1 percent in 1971 to 22.6 percent in 1981,20 although much of the decline is attributable to the growth in state sales tax and severance tax collections rela­tive to increases in federal aid. Methods of Cutting Back: Efficiency Based or Equity Based? It is usually assumed that states will cut back funds using criteria based on efficiency rather than equity. Efficiency­based procedures are seen as more regressive than redistrib­utive. In the case of the fiscal year 1982 cuts, the method of cutting was federally mandated for some programs (for example, changes in the eligibility criteria for entitlement programs). Though most of these cuts have been severely criticized by groups representing the poor, these cuts can be seen as equitable in that funding is maintained for the "truly needy" but reduced or eliminated for the "less than truly needy." SEPTEMBER-OCTOBER 1982 The state of Texas has a mixed record with regard to its cutting methods. For example, in cutting back Title XX funds (a 20 percent reduction in Texas), the Texas Depart­ment of Human Resources held a public hearing in Austin to determine how the loss of more than half a billion dol­lars should be handled. Two options were presented: cuts across the board on all Title XX programs or cuts on the basis of each program's relative importance (the priority method). Reactions of service providers (subcontractors) differed considerably. Providers of services to abused and neglected children favored the priority method, which would cut less from the Protective Services Division, while providers of day care, family planning, and emergency fam­ily services favored the across-the-board method. Each group viewed its favorite method as the most equitable.21 The problem of determining which method is most equita­ble is that both are applied to programs that are compara­tively redistributive to begin with. In the end, the state chose the priority method of cutting. Considerations of efficiency and equity also affect the handling of personnel reductions. The initial decision by the Texas Employment Commission to lay off some five hundred workers (as a result of a 13 percent reduction in funds) on the basis of seniority (an efficiency-based deci­sion) caused great furor. Clearly such a method hits minor­ities and women hardest (last hired, first fired). One esti­mate is that 60 percent of the planned cuts would have affected blacks, Hispanics, and women.22 This lay-off method was dropped soon after the U.S. Justice Depart­ment threatened litigation. In general, the state is concerned with implementing bet­ter management techniques and improving productivity. The governor was elected on such a platform and the idea is still popular among the citizenry. The state has adopted systematic performance evaluation reviews and merit rat­ings, zero-based budgeting procedures with substance, management by objectives that are audited by achievements measured against goals, and regular input from industry in improving data processing, procurement, accounting and finance, personnel, and general organization.23 The prevail­ing attitude of the governor and his planning staff is that these management principles in combination with budget cuts and block grants will eliminate unnecessary rules, regulations, paperwork, and other wasteful administrative activities and offset any reduction in actual service deliv­ery. 24 Because the data for fiscal year 1982 are not yet in, there is not yet enough evidence to determine whether this claim is true. Public outcry over service reductions has been limited to the groups affected-groups that do not hold much political clout in the state. Notes 1. Office of the Comptroller of Public Accounts, State of Texas, 1981 Annual Financial Report, State of Texas (Austin: Office of the Comptroller, 1981), table 3, p. 11. The state's fiscal year is from September 1 to August 31. 2. The nine block grants were created by consolidating fifty-seven individual program or categorical grants. Texas Office of State- Federal Relations, "The Consolidation of Federal Categorical Pro­grams: Block Grants Created by the Budget Reconciliation Act of 1981," August 13, 1981, p. 1. 3. Comptroller of Public Accounts, 1981 Annual Financial Report, p. 8. 4. Bo Byers, "Water Plan Brings Up Question: Exactly What Are Ex­cess Funds?" Houston Chronicle, July 26, 1981. 5. Some observers say state agencies have always had the authority to implement federal fund reductions but not to restore them if they fall below budget restrictions, as long as they follow legislative intent; see Bo Byers, "Austin Awaits U.S. Funding Decisions," Houston Chronicle, September 16, 1981. 6. Center for Public Policy, University of Houston, "The Texas Poll: February, 1982," Release no. l, "President Reagan and His Programs," March 8, 1982, p. l. 7. "Federal Aid a Losing Proposition for Texas," Texas Town & City, August 1981, p. 19. 8. Susan Grafeld Long, "Study Says Texas 'Paid' More for Federal Funds," Houston Post, May 27 , 1981. 9. Judy Wiessler, "Texas Losses in Budget Cuts Ranked Lowest," Houston Chronicle, January 13 , 1982. 10. Estimates of the accuracy of the projections are based on a comparison of appropriated funds (May 1981) and updated esti­mates made by the Legislative Budget Board in January 1982. 11. This figure does not include several state departments whose federal revenues for fiscal year 1982 are still not determined because their programs are covered by continuing resolutions, rather than by the Budget Resolution Act of 1981. 12. The committee would have been made up of three representa­tives, three senators, and the governor, who would have chaired it; see Richard Fish, "Purse-String Power : The Latest Plan Calls for a Special Committee to Oversee the State Budget When the Legisla­ture Is Not in Session," Houston Chronicle, September 20, 1981, and Felton West, "No Special Session Needed Right Away, Officials Say," The Houston Post, November 5, 1981. 13. Felton West, "Clements Says Chances for Second Special Ses­sion of Legislature Slim," Houston Post, August 15, 1981. 14. Bruce Hight, "Attitude of 'You Help Yourself' Holds Down State's Aid to Poor," Austin American-Statesman, February 21, 1982. 15. Bo Byers, "Where Will the Money Come from in Year 2000?" Houston Chronicle, November 29, 1981. 16 . "Head of Highway Department Says State Roads Trail Growth," Houston Chronicle, December 27, 1981. 17. Anne Marie Kilday, "TDHR Officials Brace for Cuts in Social Services, Staff," Houston Chronicle, August 16, 1981. 18. "Texas Students Better Able to Handle Reagan's Education Cuts," Houston Chronicle, September 6, 1981 (voters approved an $85 million bond program in 1965 and added another $200 million in 1969 to the state's Hinson-Hazlewood loan program), and Jim Simmon, "Road Official Backs Increased User Fees," Houston Post, February 6, 1982. 19. Hight, "Attitude of 'You Help Yourself' Holds Down State's Aid to Poor." 20. Office of the Comptroller of Public Accounts, State of Texas, "The Role of Federal Funds in State Finances," Fiscal Notes 82 (January 1982): 3. 21. Anne Marie Kilday, "Social Service Providers in State Differ on Handling of Fund Cuts," Houston Chronicle, August 18, 1981. 22. Stephen Morgan, "500 TEC Cuts Will Be Based on Seniority," Austin American-Statesman, January 1982. 23. "The State of Texas: One Place 'Reaganomics' Is Already Working," Governmental Executive 13 (December 1981): 21-22. 24. Governor's Office of Budget and Planning, "Federal Funds Analysis," memorandum, May 13, 1981, p. 1. The New Federalism and State Tax Efforts In his 1982 State of the Union address President Ronald Reagan proposed some basic changes in the sharing of gov­ernmental responsibilities among the states and the federal government. Fiscal federalism has been a major issue in U.S. political life since the post-World War II period, when the federal government began to assume more responsibility for initiating and financing programs than it had previously. Proponents of President Reagan's New Federalism argue that states and municipalities will make up the differences in programs caused by the federal government's changing its share of the burden. Between 1965 and 1979, however, combined tax efforts of states and municipalities actually decreased, while state tax efforts increased in many states from 1965 to 1980. While states might be capable of discharging their new re­sponsibilities under the new fiscal federalism, the real prob­lem has been that states have been raising their taxes in or­der to provide services that should be provided by local gov­ernments. Just as the federal government has been assuming responsibility for the funding of programs that have been administered by the states, so the states have been helping local governments fund education and other programs. It seems quite likely, therefore, that the result of placing new fiscal burdens on the states will be reductions in the pro­grams affected by the New Federalism rather than higher taxes. Federalism Issues Two major issues are involved in the debates over fiscal federalism. The first concerns which social programs should be implemented, at what scale, and who should be eligible for the benefits. Other questions involved in this issue in­clude which government should make these decisions, which government should establish the standards, whether those standards should be uniform across the nation or al­lowed to vary in accordance with local community atti­tudes, and which government should determine eligibility of recipients of the services. Charles G. Leathers is Professor of Economics and Fiscal Planning, University ofAlabama. Charles G. Leathers The second major issue concerns program financing. Should the states be responsible for levying taxes to cover the expenses or should the federal government, with its greater revenue powers, assume that responsibility? This question has two aspects, the political and the pragmatic. Political Basis The U.S. Constitution is vague on how some powers will be assigned to the two levels of government. On the one hand, the reserve powers clause states that any powers not specifically designated to the federal government are to be reserved for the states. A strict interpretation of this provi­sion would severely limit the federal government's role in fiscal federalism. In another section of the Constitution, however, Congress is given the authority to provide not only for the national defense, but also for the common wel­fare of the country. If this common welfare provision is interpreted as being dominant over the reserve powers clause, the federal government can expand its role in pro­viding both the initiating legislation and the financing of social programs that states have been reluctant to fund . Pragmatic Basis Given the constitutional vagueness of the division of fis­cal responsibilities for social programs, the pragmatic ques­tion of which level of government can do the job has heavi­ly influenced the development of fiscal federalism. While there may indeed be a prevailing philosophy (or perhaps only an ideological proposition that few really believe) that the best government is that which is closest to the voters, i.e., the local government, the fact is that states have been extremely slow to develop new social programs or, in many cases, to fund adequately the traditional programs provided by state and local governments. Two major reasons were of­ten cited for the extremely conservative fiscal nature of states. First, the balance of power in the state legislatures has often been held by a rural minority, who were not very sen­sitive to the growing social needs of the urban areas where most of the population resided. Second, a number of states were (and obviously still are) less able economically to fund SEPTEMBER-OCTOBER 1982 social programs than others. As a consequence, some states, such as New York and California, developed their own pro­gressive social programs, while other states, especially those in the deep South, made little effort to provide even the most traditional social programs. While the racial issue was undoubtedly important in many of these cases of underdeveloped state social pro­grams, at issue ultimately in each case was the position of the state as an open economy with limited taxing powers to fund social programs. It was feared that higher taxes to pro­vide such programs would tend to drive away industry and destroy the economic base needed to pay taxes. Thus, the states increasingly found themselves competing for industry by lowering taxes. At the same time, some states were able to export their social problems to states with public welfare programs. The migration of poor people from the South to the cities of the North and to California was frequently cited as an example of what happens if differences between social programs offered by states appear and was in itself a good argument in favor of the federal government assuring that uniform programs and standards would be provided. Those advocating federal initiatives in providing for so­ cial welfare were able to argue that only the federal govern­ ment had the broad revenue powers, including the power of deficit financing during a recession, necessary to fund the programs apparently desired by the majority of voters. On an equity basis, the fact that the federal tax structure was progressive (although not as much so as the statutory rates would suggest) while the state tax structures were regressive was a powerful argument in favor of federal funding of pro­ grams. Conservatives at the state level argued that the fed­ eral government had preempted the taxing powers of the states and made it especially difficult for the states to de­ velop new sources of revenue. While there is little validity to that argument, it was a way of asserting that, since the federal government had taken funds from the states, the federal government should have to return those funds by fi­ nancing the various new programs. This argument also gave the states an appealing political reason for making few tax efforts. The New Federalism According to President Reagan's State of the Union mes­sage, creation of the New Federalism would involve two major steps: a swapping of programs, with the federal gov­ernment assuming total responsibility for Medicaid and the states assuming responsibility for the Aid to Families with Dependent Children (AFDC) and Food Stamp programs, and a turning back to the states of some forty-three pro­grams now financed by the federal government. To assist the states in meeting the financial burdens of the turn back proposal, a special interim trust fund would be created. Cost of the Swap Proposal to the States The swap proposal would consolidate health-care pro­grams at the federal level and would put the public assis­tance programs at the state level. Ideologically, the argu­ment is that welfare programs should reflect the prevailing attitudes of the community. If the residents of a state feel sympathetic to the plight of the poor, they can choose to extend generous assistance. If the general attitude is not so warmhearted, however, then the welfare programs could provide only minimal assistance to the needy. The Medicaid program has become a burden to many states, and most would be more than happy to see it be­come the responsibility of the federal government. It was introduced in 1965 , along with the Medicare program, to provide medical care for those who need, but cannot af­ford, such care. When it was first introduced, Medicaid re­ceived less attention than Medicare, partly because it essen­tially expanded a relatively small existing program. Since 19 50 the federal government had helped states pay for medical costs of people receiving assistance under the federal-state welfare system. Unlike Medicare, which is uni­form for all states, Medicaid has been a state-administered program, financed by federal-state matching funds. To qual­ify for federal funds, a state's Medicaid program must cover the state's welfare population and offer certain specified services, including hospital, physician, and skilled nursing home care. No particular amounts of care must be pro­vided, and states establish eligibility criteria (basic services must be offered free to the welfare population) and the types of services offered. As a consequence, Medicaid pro­grams have varied considerably among the states (only Ari­zona does not have a Medicaid program). The costs of the Medicaid programs have increased rapid­ly as the number of eligible people and the costs of hospi­tals and medical services have increased. The federal govern­ment pays from 50 percent to 80 percent of Medicaid costs, depending upon the state's per capita income. Subject to the same cost sharing, states may offer additional services and cover medically indigent people, who have higher in­comes and who are faced with catastrophic medical costs. Spokesmen for the administration have held that the costs of the swap proposal cancel out, but many observers have expressed doubts about the equality of costs between public assistance programs and Medicaid. The American Federation of State, County, and Municipal Employees (AFSCME) has estimated that the states (including the Dis­trict of Columbia) would save $19.0 billion in fiscal year 1984 but at the same time costs would increase $20.2 bil­lion from the assumption of the two public assistance pro­grams (see table 1). Thus, the states would lose $1.2 billion from the swap proposal. The most significant problem suggested by these esti­mates is not the total net increase in costs but rather the variation of gains and losses among the states. Arizona would be a net loser since it has no Medicaid program. Wyoming would have no change in its costs because its Medicaid costs exactly equal its public assistance costs. Twelve states would have reduced costs, ranging from $3 million for Nebraska to $1.9 billion for New York, where the Medicaid program offers services well above the average. In the Southwest, Oklahoma would have a net gain (reduc­tion in costs) of $48 million. The other three states in the region would have cost increases, with Arizona being the other states would range from $3 million in Indiana to largest loser. All the southeastern states would face in-$261 million in Ohio. creases in costs, ranging from $78 million for Arkansas to $426 million for Florida. California would be the sole Costs of Turning Programs Back to the States gainer in the Pacific West, while five states in the Northeast would gain. In the North Central and Midwest regions, five The AFSCME has also estimated the costs of turning states would have reduced costs, while the losses to the forty-three programs back to the states. The special trust Table 1 Estimated Change in States' Costs from New Federalism Proposal, Fiscal Year 1984 (In millions of dollars) Swap proposal Turnback proposal Region Savings from Cost of public Net Cost from Trust fund Net Total State Medicaid assistance change turnback allocation change change Southwest Arizona 0 194 194 441 463 -22 172 New Mexico 57 148 91 271 251 20 111 Oklahoma 228 180 48 479 249 230 182 Texas 833 895 62 2,102 1,352 750 812 Southeast Alabama 140 431 291 725 713 12 303 Arkansas 137 215 78 441 345 96 174 Florida 348 774 426 1,661 1,433 228 654 Georgia 285 531 246 972 819 153 399 Kentucky 186 453 267 734 690 44 311 Louisiana 309 467 158 813 634 179 337 Mississippi 109 361 252 546 563 -17 235 North Carolina 277 462 185 1,041 820 221 406 South Carolina 128 348 220 575 553 22 242 Tennessee 267 494 227 818 702 116 343 Virginia 250 355 105 835 617 218 323 Pacific Coast Alaska 32 65 33 239 188 51 84 California 2,524 2,503 21 3,804 2,144 1,660 1,639 Hawaii 94 130 36 192 145 47 83 Oregon 128 203 75 513 393 120 195 Washington 248 296 48 724 493 231 279 Northeast Connecticut 277 208 69 562 283 279 210 Delaware 38 49 11 152 107 45 56 District of Columbia 141 104 37 562 333 229 192 Maine 81 126 45 316 240 76 121 Maryland 342 349 7 816 507 309 316 Massachusetts 669 515 - 154 1,417 732 685 531 New Hampshire 57 49 8 182 110 72 64 New Jersey 557 525 32 1,497 907 590 558 New York 4,002 2,063 -1,939 4,496 789 3,707 1,768 Pennsylvania 967 1,079 112 2,523 1,658 865 977 Rhode Island 95 96 1 203 124 79 80 Vermont 32 65 33 140 118 22 SS North Central and Midwest Illinois 857 1,033 176 2,257 1,547 710 886 Indiana 336 339 3 882 552 330 333 Iowa 166 173 7 513 330 183 190 Kansas 141 116 25 392 225 167 142 Michigan 914 1,078 164 1,710 1,147 563 727 Minnesota 501 249 - 252 771 236 535 283 Missouri 247 365 118 940 700 240 358 Nebraska 77 74 3 291 185 106 103 North Dakota 45 25 20 154 83 71 51 Ohio 744 1,005 261 1,925 1,406 519 780 South Dakota 32 41 9 177 124 53 62 West Virginia 65 192 127 487 429 58 185 Wisconsin 633 365 268 825 235 590 322 West Colorado 161 165 4 516 331 185 189 Idaho 31 63 32 189 151 38 70 Montana 43 48 s 190 128 62 67 Nevada 70 37 33 140 58 82 49 Utah 61 74 13 264 182 82 95 Wyoming 17 17 0 111 75 36 36 Total 18,979 20,192 1,213 43,526 27,599 15,927 17,140 Source: AFL-CIO, Reaganomics: The Second Dose (reprinted from the AFL-CIO American Federationist, February 1982). SEPTEMBER-OCTOBER 1982 fund that would be provided from federal excise taxes on gasoline, tobacco, alcohol, and telephones plus oil windfall profit tax revenue was estimated by the AFSCME, using U.S. Treasury data, to be $27.6 billion in fiscal year 1984. The total cost of the programs turned back is estimated to be $43.5 billion, creating a total increase in cost for the states of $15.9 billion. Again, the variations among the states are particularly significant. Only Arizona and Missis­sippi would have net cost reductions because of the turn­back proposal. Arizona's cost would fall by $22 million while Mississippi would save $17 million. The cost in­creases, on the other hand, would range from $12 million in Alabama to $3.7 billion for New York. When changes from both the swap and turnback propos­als are computed, no state would reduce its costs. The cost increases would range from $36 million for Wyoming to $1.6 billion for California and $1.8 billion for New York. On a regional basis, Texas would be the big loser in the Southwest, with a total cost increase of $81 2 million. State Tax Efforts A serious question has been raised over the reactions of states to such large increases in their program costs at a time when many states are having difficulty funding pro­ grams in education, highways, hospitals, mental heaHh, and prisons and when most local governments are having lean times in all operations. The problem is compounded by the interim nature of the special trust fund. Beginning in fiscal year 1987, this trust fund would be reduced by 25 percent annually and would be eliminated altogether in 1991. States would either have to increase taxes (presumably picking up the excise taxes phased out by the federal gov­ ernment), cut back on the programs accepted under the swap and turn back proposals, or finance those programs at the expense of other programs. The increased tax effort required in fiscal year 1984 just for the forty-three programs in the turnback proposal were estimated by Senator Daniel Patrick Moynihan to average 8.8 percent (see table 2). 1 Significantly, his estimates for the total increased cost to the states (net of the trust fund allocations) was several billion dollars less than the esti­mates by the AFSCME. The greatest increase in state taxes would be required of New Hampshire and South Dakota. All four southwestern states would be required to make below-average percentage increases, ranging from 7 .8 percent for Texas down to 6.5 percent for Oklahoma. The southeastern states, with the exception of Louisiana and Virginia, would have to make above-average percentage increases, and even Louisiana and Virginia would have to increase their taxes by more than 8.0 percent. In view of these substantial cost increases, can the states be expected to make the necessary increased tax efforts to avoid sharply reducing these programs or other programs? President Reagan has confidently stated that states are dif­ferent now from what they were in the early 1960s when they refused to fund these programs. He contends that fed­eral court-ordered reapportionment of legislatures, which has substantially reduced the influence of rural minorities and provided true majority rule, and increased voting rights among the nation's ethnic minority groups make it prob­able that states will respond positively to their new fiscal re­sponsibilities. It is interesting to observe how state tax efforts have changed between 1965, just before the introduction of most of these social programs, and 1980, when the factors that Reagan mentioned should have had time to show their Table 2 Estimated Increase in State Taxes Needed to Cover Costs of Turning Back Forty-three Programs to States, 1984 Percentage State increase in taxes New Hampshire South Dakota District of Columbia Maine Vermont Missouri Tennessee Montana Mississippi West Virginia Arkansas Ohio Nebraska Colorado Idaho North Dakota Alabama Rhode Island Pennsylvania Massachusetts New York Kentucky Georgia Oregon South Carolina Indiana Florida Utah Illinois North Carolina New Jersey Louisiana Kansas Iowa Michigan Maryland Virginia Delaware Nevada Connecticut Texas Arizona Washington Wyoming New Mexico Minnesota Wisconsin Oklahoma California Hawaii Alaska Average 20.45 18.02 15.07 14.74 14.42 13.30 12.65 12.40 11.88 11.63 11.27 11.10 10.95 10.79 10.60 10.42 10.24 10.13 10.06 9.89 9.79 9.75 9.74 9.64 9.55 9.51 9.46 9.40 9.34 9.23 9.01 8.77 8.55 8.47 8.38 8.36 8.36 8.30 8.23 8.20 7. 79 7.45 7.02 6.99 6.96 6.94 6.89 6.50 5.62 5.33 3.10 8.81 Source: Bernard L. Weinstein, "New Federalism-or New Feudal­ism?" Challenge, May-June 1982, Table 1, p. 40. influences. Measuring tax effort is, of course, difficult for a In 1965, state taxes as a percentage of state personal in­number of reasons, including the question of what tax ef­come ranged from a low of 2.5 percent in New Jersey to a fort actually means. 2 A simple, and probably relatively high of 8 .3 percent in New Mexico. In 1980, the range was meaningful, statistic is the total tax revenue from all state from a low of 3.5 percent in New Hampshire to a high of taxes and from combined state and local taxes as percent­17.9 percent in Alaska. (The latter figure, it must be ages of the state's personal income (see table 3). pointed out, was a substantial aberration from the rest of the states. The next highest Table 3 effort in 1980 was 9.2 percent in New Mexico.) From 1965 to State Tax Efforts and State-Local Tax Efforts 1980 only one state, Louisiana, (In percentage) reduced its state tax effort. The increases in the other states State tax effort State-local tax effort varied substantially, with no real Region Percentage change, Percentage change, State 1965 1980 1965-1980 1965 1979 1965-1979 discernible pattern appearing. The data on combined state Southwest and local tax effort is a bit Arizona 6.2 7.2 16.1 11.2 11.7 4.5 New Mexico 8.3 9.2 10.8 11.1 11.2 0.9 more sobering for those who Oklahoma 6.3 6.3 0.0 9.4 9.0 4.3 expect the states to increase Texas 4.9 4.9 0.0 8.9 8.5 4.5 taxes to pay for the programs Southeast Alabama 6.4 6.6 3.1 8.8 8.9 1.1 involved in the New Federal­Arkansas 6.0 7.6 26.7 8.6 9.6 11.6 ism. Not only are the increases Florida 5.4 5.6 3.7 9.6 9.0 -6.3 Georgia 5.8 6.2 6.9 8.8 9.8 11.4 in tax effort of a generally Kentucky 6.0 8.1 35.0 8.6 10.l 17.4 smaller magnitude at this level, Louisiana 7.9 7.2 -8.9 10.7 10.5 -1.9 but also the combined state Mississippi 5.2 7.9 51.9 10.6 10.2 -3.8 North Carolina 6.9 7.1 2.9 9.2 9.7 5.4 and local tax effort actually South Carolina 6.6 7.5 13.6 8.3 9.9 19.3 decreased between 1965 and Tennessee 5.6 5.7 1.8 8.8 9.0 2.3 Virginia 4.4 5.7 29.5 7.8 9.4 20.5 1979 in a number of states. Pacific Coast Since these data are for 1979, Alaska 5.5 17.9 225.5 7.8 22.6 189.7 there was probably not suffi­ California 5.2 6.2 19.2 11.6 10.5 -9.5 Hawaii 6.9 7.1 2.9 10.4 12.6 21.2 cient time for the tax revolt, Oregon 5.3 6.2 17.0 10.2 10.8 5.9 which began with Proposition 13 Washington 6.9 7.9 14.5 10.1 10.2 1.0 in California and moved to a Northeast Connecticut 4.1 5.3 29.3 8.6 9.8 14.0 number of other states, to play a Delaware 7.1 9.0 26.8 8.9 11.0 23.6 significant role. Therefore, the Maine 5.2 7.0 34.6 10.2 11.0 7.8 Maryland 5.0 6.7 34.0 8.7 11.0 26.4 total willingness of states, to­ Massachusetts 4.1 7.0 70.7 9.9 13.1 32.3 gether with their local govern­New Hampshire 3.2 3.5 9.4 8.7 8.6 -1.1 ments, to impose new taxes to New Jersey 2.5 5.2 108.0 8.3 10.9 31.3 New York 4.8 7.2 50.0 11.3 15.0 32.7 meet the additional costs from Pennsylvania 4.9 6.7 36.7 8.9 10.6 19.1 the New Federalism has to be re­Rhode Island 5.0 6.7 34.0 9.3 11.3 21.5 garded with some skepticism. Vermont 6.9 7.4 7.2 12.0 12.4 3.3 North Central and Midwest Illinois 3.5 5.7 62.9 8.1 10.1 24.7 Notes Indiana 4.7 5.8 23.4 9.0 8.8 -2.2 Iowa 4.5 6.2 37.8 10.3 10.3 0.0 1. Bernard L. Weinstein, "New Fed­ Kansas 4.5 5.5 22.2 10.3 9.6 -6.8 Michigan 5.4 7.0 29.6 9.6 11.2 16.7 eralism-or New Feudalism?" Chal­ Minnesota 5.5 8.7 58.2 11.2 12.3 9.8 lenge, May-June 1982, pp. 38-45. Missouri 4.3 5.0 16.3 8.4 8.8 4.8 See also, American Federation of Nebraska 3.0 5.5 83.3 8.4 10.4 23.8 Labor and Congress of Industrial North Dakota 5.5 6.0 9.1 10.9 9.1 -16.5 Ohio 3.6 5.0 38.9 8.0 8.8 10.0 Organizations, Reaganomics: The South Dakota 4.1 4.7 14.6 10.9 9.9 9.2 Second Dose (reprinted from the West Virginia 6.6 8.2 24.2 9.5 10.4 9.5 AFL-CIO American Federationist, Wisconsin 6.5 8.1 24.6 11.4 12.0 5.3 West February 1982), and "The New Fed­Colorado 5.0 5.7 14.0 10.8 10.6 1.9 eralism: The Reagan Plan to Decen­Idaho 5.6 6.7 19.6 10.2 10.0 2.0 tralize Authority," Washington Social Montana 4.6 6.4 39.1 10.9 11.4 4.6 Legislation Bulletin 27 (March 22, Nevada 5.3 6.2 17.0 8.2 10.6 29.3 Utah 1982): 117-20. 6.3 7.0 11.1 10.8 11.0 1.9 Wyoming 5.5 7.7 40.0 10.9 13.1 20.2 2. See Charles G. Leathers, "Measur­ ing Relative Tax Effort in Federal­Note: State tax effort is total state taxes divided by total state personal income. State-local tax effort State Revenue Sharing Programs," is total state and local taxes divided by total state personal income. Source: Calculated with data from Tax Foundation, Inc., Facts and Figures on Governmental Finance Business and Economic Dimensions, selected issues. ' March 1969, pp. 1-5. SEPTEMBER-OCTOBER 1982 The Changing Politics of Oil James E. Anderson Since the energy crisis first struck the United States, scholars, publicists, and public officials have generated a substantial body of literature dealing with energy, but one finds little in this literature about the politics of energy pol­icy .1 Indeed, it is possible to draw from a survey of the ener­gy literature the notion that if enough analysis and informa­tion are spent on energy problems and policies some agree­ment will emerge as to what should be done. That such is not the case is readily apparent to anyone who has paid the least attention to the political struggles over energy policies over the last few years. Changing energy conditions have changed the politics of oil from its traditional nature. Governments in the United States have long been active­ly involved with the oil industry. Indeed, except for the in­dustry's earliest years, government has never been unin­volved in oil. As promoter and regulator, as partner and antagonist, government has played a major role in the in­dustry's development and operation. Traditionally, resis­tance to government intrusion, when it came from the in­dustry, was based much more on self-interest than philo­sophic concern for limited government or a consistent pre­ference for a policy of laissez faire. The Old Oil Policy A variety of interests have a stake in petroleum policy. These include consumers (homeowners, motor vehicle op­erators), producers (major integrated companies or indepen­dents), landowners with developmental leases, such related companies as drilling contractors and supply companies, producers of competing forms of energy, and governments. The latter interest includes state and local governments in producer areas, for whom oil production is a source of revenue; foreign governments, who are competing pro­ducers of oil; and national defense interests in oil. Policy makers, in short, are confronted by a complex variety of interests, among which they seek some sort of balance. James E. Anderson is Professor of Political Science, University of Houston. Traditionally, however, oil policy has been dominated by producer interests because producers have been organized, possessed of expert knowledge, and equipped with ample political resources (especially money). Consumer interests then were disorganized, as was customarily the case; more­over, gasoline, the primary petroleum product of interest to consumers, was both plentiful and cheap. Oil politics were usually carried on at a low level of political visibility, which reduced the likelihood of participation by anyone who did not have clear, strong interests at stake. Policies to benefit the oil industry have also focused on comparatively few beneficiaries; their costs were diffused among large numbers of consumers or taxpayers. On the other hand, a regulatory policy intended to protect con­sumers would have had diffuse benefits while its costs would have been imposed on a much smaller group. In such instances the smaller group with high interests has a much greater incentive to organize and seek to influence govern­ment action.2 As David Prindle has noted in Petroleum Pol­itics and the Texas Railroad Commission, the old politics of oil "was a politics of surplus, and the disagreements it spawned, while intense, were relatively uninteresting to the public at large."3 From the 1930s until the early 1970s public policy re­lating to the oil industry had four major components: the control of oil production by the state governments, sup­portive action by the national government to help make state regulation effective, the limitation of foreign oil im­portation, and favorable tax treatment of the oil industry by the national government. Although this policy pattern involved substantial interference with the market, the in­dustry generally supported it. The state governments were the primary regulators in this scheme of things. In Texas, which was the leading oil­ producing state, regulation was handled by the Railroad Commission of Texas. Its responsibilities included regulat­ ing the technical aspects of production (such as well-spacing and well-drilling practices), determining the permissible volume of production, and assigning production allowables to the various producers. The prorationing of production to demand, which was the most controversial aspect of regula- tion, was authorized by the Texas legislature in 1932 to deal with the flood of East Texas oil that had depressed market prices to as low as ten cents a barrel. Prorationing, intended to bring supply and demand into better balance, involved limiting the production of oil field by field and well by well. Prorationing was justified as a conservation measure, but it also was used to support the price of oil above free market levels. Control of production by Texas and the other oil-producing states would not have been ef­fective in enhancing prices without cooperation among the states. The Federal Oil Conservation Board (a now defunct national agency) recommended the establishment of an in­terstate compact to provide states with oil production quotas. Some state representatives wanted an organization with mandatory power to enforce quotas, but when Con­gress established the Interstate Compact to Conserve Oil and Gas in 1935 the organization was not given such power, although it was able to secure cooperation among the various state regulatory agencies by the dissemination of information, informal discussions, and other means. The Connally "Hot Oil" Act of 1935 also gave the national government's support to state regulation by prohibiting the movement in interstate commerce of oil produced in violation of state production laws. Monthly forecasts of the quantity of domestic oil needed to meet demands for crude oil and petroleum products were made by the Bureau of Mines and then broken down state by state to assist the states in setting production limits. The importation of foreign oil did not present a real threat to this regulatory system until the early 1950s, when it became possible to produce oil abroad, transport it to the United States, and sell it profitably at prices below the pre­ vailing price. A voluntary oil importation control program was established in 195 5 by the administration of President Dwight D. Eisenhower. When this program proved ineffec­ tive, Congress in 1958 converted it into a mandatory pro­ gram that remained in effect until 1973 and was commonly justified as necessary to protect national security by reduc­ ing American dependence on foreign oil. Favorable provisions in national tax legislation also benefited the oil industry. The depletion allowance adopted in 1925 provided that 27.5 percent of an oil company's gross income, up to a limit of 50 percent of its net income, could be deducted from taxation. Also, oil companies could take immediate deductions for "intangible drilling ex­ penses," such as labor, fuel, and tool rental costs. If these provisions increased exploration, drilling, and production of oil, they also increased the profitability of the industry. Another tax boon permitted international oil companies to deduct, dollar for dollar, from their U.S. taxes owed the taxes paid to foreign governments. This regulatory structure attracted little public atten­tion. In Texas the railroad commission was well known within the oil industry and responsive to the interests of in­dustry members, but its power and importance were, at best, poorly comprehended among the general population. Proceedings of the railroad commission attracted little pub­lic attention. At the national level, oil matters were also handled by a policy subsystem characterized by limited participation and low visibility. The House Ways and Means Committee and House and Senate interior committees, some members of Congress from major oil-producing states, the Bureau of Mines and the Division of Oil and Gas within the Interior Department, and the American Petroleum In­stitute were the major components of a rather closed policy system that made it easy for the industry and its supporters to fend off unwanted changes. For example, efforts to re­duce the oil depletion allowance in 1950-1951 and 1962­1963 were killed in the House Ways and Means Committee without any public votes. During Sam Rayburn's tenure as Speaker of the House it was said that no Democrat opposed to the depletion allowance could be appointed to the Ways and Means Committee. Again, industry opposition was im­portant in the government's decision in the mid-1950s to close down facilities for research and development on oil shale.4 It is instructive to compare the traditional policy pro­cesses for oil and natural gas. Although often produced by the same companies from the same wells, the two sub­stances were handled by quite different policy processes. The process that developed natural gas policy was charac­terized by high visibility, sharp controversy, and wide parti­cipation. The Natural Gas Act of 1938, which authorized the Federal Power Commission (FPC) to regulate the rates charged by natural gas pipeline companies, was ambiguous on whether the FPC could regulate the price producers charged pipeline companies at the wellhead. After years of controversy, the U.S. Supreme Court finally ruled in 1954 that the FPC was required by the statute to regulate well­head prices. Efforts to enact legislation to deprive the FPC of this authority were twice vetoed-once by President Harry S. Truman and once by President Eisenhower. Thus, national policy on natural gas featured price regulation on behalf of consumer interests. As things stand now, the Nat­ural Gas Policy Act of 1978, enacted by Congress at the be­hest of the administration of President Jimmy Carter and over the strong opposition of consumer groups, provides for the deregulation of the price of all new natural gas by 1985. The act provides, however, that residential consumers will still have first claim on the nation's natural gas supplies. The structure and operation of policy making can clearly have an important effect on the nature of the policy. Na­tionally, subsystem politics for oil yielded a producer­oriented policy, while a more visible process for natural gas produced consumer-oriented public policy. The New Politics of Oil In the late 1960s the growing concern about the environ­ment and the pressure exerted by environmental groups began to expand participation in oil politics, and oil com­panies began to be more concerned about the environment­al consequences of their operations and the reaction of the public to these consequences. The major factor producing change in the politics of oil, however, was U.S . dependence, by the early 1970s, on for­eign oil producers to meet its expanding demand for petro- SEPTEMBER-OCTOBER 1982 leum. Domestic production of oil peaked in the early 1970s. In 1970 the United States imported about 24 per­cent of its total petroleum consumption ; by the end of the decade this figure had nearly doubled. (It has since de­clined.) The 1973 Arab oil embargo, which caused short­ages of gasoline and heating oil and increased prices in the winter of 1973-1974, starkly dramatized the changes in the U.S. petroleum situation and helped to change the politics of oil. To some extent, the politics of energy has replaced the politics of oil. In the old political order several essentially distinct policy areas existed, each organized around a par­ticular source of energy. Each operated essentially apart from the others and had its own processes for solving prob­lems. Policy making for electric utilities seemed to have lit­tle significance for the oil policy subsystem and vice versa. 5 The energy crisis has brought demands for more rational and comprehensive national energy policies. Policy makers now seem inclined to take a broader view of the nation's energy needs and resources and to be concerned with how the policy treatment of one energy source may affect the development or use of other energy sources. Thus, David Davis says that the Energy Policy and Conservation Act of 197 5 "was an elaborate and self-conscious attempt to deal with the problem holistically."6 Note, though, that the pol­icy process has not necessarily been transformed; such a transformation would not be possible given the pluralistic nature of energy politics and the differing interests of the producers and users of various sources of energy. Participation in the formation of oil policies, however, has expanded. Public interest and environmental groups (such as Common Cause, the Sierra Club, and Ralph Na­der's organization), as well as a wider range of public offi­cials, have become involved. Individual citizens have be­come more aware of the importance of oil. The limited participation of the past is just that-a thing of the past. Charles 0 . Jones has summed up the nature of expanded participation in the development of energy and oil policies in the following manner: Note that the expansion is up, out, and over-up in public and private institutional hierarchies (e.g., the involvement of presidents of companies and coun­tries, rather than just low-level bureaucrats, and of congressional party leaders rather than just subcom­mittees); out to groups that declared an interest in energy policies (e.g., environmentalist, public interest, and consumer groups) ; and over to decision-making processes in other nations or groups of nations (e.g., OPEC and the middle eastern nations with regard to oil, and several countries with regard to nuclear Research Monograph Series Bureau of Business Research P.O. Box 7459 Austin, Texas 78712 The Gross Regional Product of Texas and Its Regions Thomas R. Plaut and Mildred C. Anderson. 1981. $6.00 plus tax. The study offers quarterly estimates of Texas gross regional product from 1958 to 1979 and annual estimates from 1965 to 1977 for the 24 Texas planning regions. Accompanying the estimates are analyses of trends in the growth of output as well as in the structure of production . Texas Railroads: A Record of Construction and Abandonment Charles P. Zlatkovich. 1981 . $7 .00 plus tax. Published with the Texas State Historical Society. Previously unpublished information on railroad construction and abandonment in the state. The author offers maps of rail networks from 1860-1980, describes the development of the rail networks in Texas, and comments on the situation at present. Severance Taxes on Coal and Uranium in the Sunbelt Malcolm Gillis and Ignatius Peprah. 1981 . $5.00 plus tax. The study covers recent changes in severance taxes on coal and urani­um, assesses the outlook for aggressive and passive state taxation policies, and considers the effects of such taxation on production, investment, and the environment. While the primary focus is on Sunbelt states, data from other states are presented for comparison. Economic Change along the U.S.-Mexican Border: The Case of Brownsville, Texas Michael V. Miller. Early 1982. $5.00 plus tax. The author examines the industrial development and economic change in the border city of Brownsville. The findings are likely to be applicable to other southwestern border cities as well. power). One is tempted to add across to this list, given the demands for comprehensive planning and program coordination, a development having the effect of forcing resourse-based subsystem partici­pants into considering each other. 7 Moreover, the states, and especially Texas, are no longer the leading governmental decision makers on questions in­volving the supply and price of oil. That these matters are now the province of the national government (I leave the international situation alone) is readily apparent. Whereas the Railroad Commission of Texas was probably not, in the past, the obscure state agency Prindle asserts that it was, it may become more obscure in the future because of its diminished role. No longer does it vary the level of monthly "allowables" for production and, thereby, affect the price of oil. The railroad commission does continue to regulate other aspects of oil production and in recent years has been given other responsibilities, such as the control of coal and lignite production, including strip-mining, in the state. As the national government has become more actively involved in energy and oil matters and as the politics of oil has become national, the number of congressional commit­tees and national administrative agencies that have some jurisdiction over energy and oil policies has proliferated. In Congress, twenty-three committees and forty-six subcom­mittees currently have jurisdiction over such policies, while in the executive branch fifteen agencies, nine departments, and five offices have authority in regulating energy mat­ters. 8 Many, but not all, of these committees and agencies have a role in the formation and implementation of policies affecting the oil industry and, thus, further fragment ener­gy and oil politics. This fragmentation enhances the need for bargaining and compromise in policy making, slows down the decision-making process, and contributes to the incremental nature of most policies. Expanded participation means that it has become more difficult to make decisions on energy and oil issues. Greater participation by consumer and public interest groups, in­creased public awareness of the effect of oil policies, and greater sensitivity on the part of public officials toward consumer interests have meant that the interests of con­sumers have been more fully considered in the formation of oil policies. More than that, the substance of oil policies has re­flected this attentiveness to consumer interests, as the mat­ter of oil prices illustrates. Historically, a goal of public oil policy was to keep the price of oil above what it would have been in the unrestricted market. As the growing scar­city of oil and, especially, the actions of the Organization of Petroleum Exporting Countries (OPEC) pushed the price of oil to higher levels, the oil companies displayed a new af­fection for the market and market prices (or what could be passed off as such). These prices, however, were not to the liking of consumers and others who felt their interests were threatened or adversely affected by them. To make a long and complex story short and simple, for a decade, begin­ning with the imposition of price controls on oil by the ad­ministration of President Richard M. Nixon in 1971 and ending with their termination in early 1981 by the adminis­tration of President Ronald Reagan (a few months before they would have expired legislatively), the goal of public oil policy was to hold the price of domestic oil below the world price. Arguably, this action was in the interest of consumers; it was stoutly opposed by the oil industry. The expiration of oil price controls can be attributed to a combination of factors-strong opposition from the oil industry, growing public acceptance of higher prices for pe­troleum and petroleum products, the policy preferences of the Carter and Reagan administrations, and a lot of agita­tion and advocacy by economists and others for greater reliance on market solutions to the energy crisis. Nor should one fail to mention that the windfall profit tax imposed in 1980 was part of the price the oil industry and its supporters paid for the lifting of oil price controls. The oil industry has probably not suffered a substantial loss of political power as a consequence of the new politics of oil. The oil industry does encounter more political oppo­sition than it once did and does not obtain everything it wants from governments. Some relative loss of power, how­ever, is not the loss of all power. The oil industry still pos­sesses extensive political resources-organization, money, expertise-and continues to be a powerful participant in the politics of oil and energy. Moreover, given the oil industry's important position in the economy, government must be reasonably responsive to the industry's interests in order to secure greater oil production. 9 Finally, government will continue to play an important role in the oil industry, as it always has. Moreover, while the oil policy subsystem is more expanded and open than it was in the past, it still exists as a distinguishable subsystem. No unified, integrated decision-making system for energy has developed in Washington, nor does such a system seem likely for the near future. Notes 1. I use the word politics to mean an activity that arises out of con­flicts that result because people have differing ideas about, and in­terests in, what governments should do; these activities generally in­volve some attempts to influence public policy. Public policy is what a government does, or does not do, over time regarding some problem or concern (such as oil prices or nuclear safety). 2. See James Q. Wilson, ed., The Politics ofRegulation (New York: Basic Books, 1980), chap. 10. 3. David F. Prindle, Petroleum Politics and the Texas Railroad Com­mission (Austin: University of Texas Press, 1981), p. 96. 4. John M. Blair, The Control of Oil (New York : Pantheon Books, 1976), pp. 334-40. 5. Don E. Kash et al., Our Energy Future (Norman: University of Oklahoma Press, 1976), p. 48. 6. David Howard Davis, Energy Politics, 3rd ed. (New York: St. Martin's Press, 1982), p. 283 . 7. Charles 0. Jones, "American Politics and the Organization of Energy Decision Making," Annual Review ofEnergy 4 (1979): 105. 8. Walter A. Rosenbaum, Energy, Politics and Public Policy (Wash­ington, D.C.: Congressional Quarterly Press, 1981). 9. On this point generally see Charles E. Lindblom, Politics and Markets (New York: Basic Books, 1977), chap. 13, "The Privileged Position of Business." SEPTEMBER-OCTOBER 1982 Petrochelllicals and Pollution • Ill Texas and Louisiana Keith Chapman Recently the U.S. petrochemical industry has been a focus of environmental concern, which has been reflected in public opposition to specific developments and in the priority accorded to the organic chemical industry in the formulation of performance standards and guidelines under the 1970 Clean Air Amendments and the 1972 Water Pollu­tion Control Amendments. 1 In addition to its position near the top of any list of polluting industries, the petrochemical sector has several features that have drawn attention to its environmental implications. It is characterized by large manufacturing sites and agglomerations that raise the pros­pect of complex cumulative and synergistic effects upon the surrounding environment. Furthermore, rapid growth has focused attention upon the industry since major expan­sions and site developments provide the justification for ex­ternal scrutiny of its operations. Texas and Louisiana have probably had more experience with the environmental problems associated with the petro­chemical industry than other states have had, since the Gulf Coast area has been an important petrochemical area since the late 1940s. My analysis of the atmospheric and effluent discharges of fifty-six plants in these two states between 1970 and 1978 indicates that the transfer of the ultimate responsibility for pollution regulation from state to federal agencies has coincided with a significant improvement in the pollution control performances of most Texas and Lou­isiana plants. Although improvements in air quality have only been marginal, the environmental quality of water in the vicinity of petrochemical plants has improved percepti­bly. This period of increasing federal involvement in pollu­tion control policy has also resulted in political tensions in the division of administrative responsibilities between such state authorities as the Texas Air Control Board (T ACB) and federal agencies, such as the Environmental Protection Agency (EPA). The experiences of Texas and Louisiana planners in coming to grips with the environmental rami­fications of petrochemical growth may be of use to plan­ners in other parts of the world faced with similar growth.2 The petrochemical industry in Texas and Louisiana is clustered; virtually all of the major complexes are in a belt paralleling the Gulf Coast from Corpus Christi in the west to New Orleans in the east (see figure I). Within this zone, distinctive clusters may be identified in such locations as Keith Chapman is Senior Lecturer in Geography, University of Aberdeen, Scotland. the Houston Ship Channel, the "Golden Triangle" of Beaumont-Port Arthur-Orange, Lake Charles, and the banks of the Mississippi River between Baton Rouge and New Orleans. The agglomeration of these facilities accentu­ates pollution problems and makes it difficult to reconcile environmental policy objectives with the continued growth of local and regional economies that largely depend upon petroleum processing. Atmospheric Emissions and Air Quality The complexity of atmospheric emissions from petro­chemical plants is recognized by the EPA, which in 1978 ranked the organic chemical industry at the top of a prior­ity list of seventy-two industries for which it intended to promulgate new source performance standards by August 1982. 3 Although it is widely recognized that an extensive range of potentially toxic compounds may be released into the atmosphere from petrochemical installations, most at­tention has been directed towards monitoring the various "criteria pollutants" identified in the 1970 Clean Air Arpendments and, more recently, substances (such as vinyl chloride) that are included in the legislation relating to l!azardous air pollutants. Hydrocarbons and nitrogen dioxide, quantitatively the most important emissions from petrochemical plants, are significant not so much because of their direct effect on human health as for their presumed role in the formation of photochemical oxidants. These secondary pollutants, which have a wide range of toxicolog­ical effects, include a large number of compounds, of which the most important is ozone, and are derived by a complex series of chemical transformations based upon oxides of nitrogen and hydrocarbons. The EPA has assumed that the restriction of emissions of nonmethane hydrocarbons will reduce one of the essential ingredients in the process that creates photochemical oxi­dants and that oxidant formation would be correspondingly reduced. This thinking was implicit in the adoption by the T ACB, at the beginning of 1972, of the first Texas regula­tion aimed at controlling hydrocarbon emissions from point sources. Reference to TACB emission inventory data for 1973 and 1975 confirms that these regulations resulted in substantial declines in hydrocarbon emissions at most pet­rochemical plants in Texas as companies improved their equipment and operating practices, especially in product storage areas. Cor­ responding advances Figure 1 in hydrocarbon con­ The Petrochemical Industry in Texas and Louisiana trol occurred in Lou­ isiana, where a com­parison of emissions inventory data for 1975 and 1978 re­vealed a similar pat­tern of decline. In 1971 the EPA defined a specific national air quality standard for photo­chemical oxidants, but it soon became apparent that large sections of the coun­try could not attain this standard by the required dates and the standard was re­laxed in 1979 from 0.08 parts per mil­lion (ppm) of ozone to 0.12 ppm, not to be exceeded for more than one hour a year. Despite this change, in which the petro­leum lobby was a sig­nificant factor, sev­eral parts of Texas and Louisiana still ' ' ... _--... _____ .. --.. --, ' ' ' Oalas.-o'·' \ I I ' -' o°*­ ' TEXAS ..... ' A : fl¥erl8 aiplClly 111BJ ,,,_ ~i ' ' '(a)! ... have not attained the weaker oxidant standard (see figures 2 and 3). These areas of nonattainment correlate closely with the location of oil-refining and petrochemical activities. Harris, Galves­ton, and Brazoria counties in Texas, which account for a major proportion of the state's petrochemical capacity, dis­play the highest ozone levels,4 while in Louisiana, Calcasieu Parish, in which Lake Charles is situated, and the Mississippi parishes extending southwards from Baton Rouge towards New Orleans are all classified as nonattainment areas. The persistence of the oxidant problem suggests that the results of almost ten years of efforts to limit hydrocarbon emissions have been disappointing. These results tend to confirm doubts, expressed on many occasions by represen­tatives of the T ACB, concerning the logic of the EPA 's assumption that a direct link exists between hydrocarbon emissions and smog formation. While no one doubts the existence of some kind of a connection, the photochemical oxidant problem appears to be a more complex phenome­non. Whereas emissions of sulphur dioxide and particulates, for example, may be expected to affect measurably the air quality in the immediate vicinity of a specific source, the derived effect of nitrogen dioxide and hydrocarbon emis­sions (in the form of higher ozone levels) is unlikely to be apparent locally. Given the complexities of the oxidant SEPTEMBER-OCTOBER 1982 formation process, it is perhaps unreasonable to expect restrictions on hydrocarbon emissions from specific point sources, such as petrochemical plants, to improve air qual­ity measurably. Effluent Discharges and Water Quality The discharge of aqueous effluents from petrochemical plants is generally regarded as a more serious problem than either the release of pollutants into the atmosphere or the disposal of solid wastes. The manufacture of chemicals typically uses great amounts of water, and it has been esti­mated that this sector will be the biggest single industrial water consumer in the United States by the year 2000. 5 A significant proportion of this demand will be concentrated in Texas and Louisiana: the Gulf Coast is expected to account for approximately one-fifth of total industrial water demand by the end of the century. The daily intake of fresh water by Standard Industrial Classification number 28 (chemicals and allied products) in the Texas coastal zone in 1968 was second only to electric power generation, and the chemical industry was by far the biggest user of saline water.6 The volume of the return flow is even more impor­tant than the size of the original intake as far as water pollution is concerned . The quality of return flows depends upon the uses to which the water has been put, but the chemical industry is undoubtedly a major polluter of watercourses in the United States. In 1973, it accounted for 35 percent of the biochemical oxygen demand imposed by effluents from manufacturing as a whole, second only to the pulp and paper industry .7 The characteristics of effluents from petrochemical plants are difficult to describe. The quantity of discharges is strongly influenced by the type of cooling system used, and the quality is largely determined by process use. Effluents from processes generally include dilute mixtures containing traces of either the original raw materials, the finished pro­ducts, or other by-products formed during the reaction. These complex mixtures cannot be described specifically ; consequently, the pollution potential of petrochemical wastes cannot easily be measured in terms of quantitative levels of specific contaminating compounds. General meth­ods of characterization must be used. These standard mea­surements provide common yardsticks for comparisons and define such properties of an effluent as its biochemical oxy­gen loading, pH value, and content of suspended solids. Figure 2 The Photochemical Oxidant Problem in Texas Count~s not attaining: l1:J Primary ozone standard n971) EEJ Primary ozone standard (EPA designation only) (1971 and 1979) CJ Primary ozone standard (EPA and TACB designation) n971 and 1979) 128km The environmental desirability of better standards for petrochemical effluent treatment is emphasized by the ad­verse effect of petrochemical discharges upon several water­courses in Texas and Louisiana. For example, in 1979 three of the top five priority stream segments ranked by the Tex­as Department of Water Resources, using discrepancy between actual water quality and the agency's quality objectives, are closely associated with petrochemical opera­tions. 8 Segments with serious pollution problems include Oyster Creek (which receives effluent from one of Dow's Freeport plants), Houston Ship Channel segments from the Turning Basin downstream to the confluence with the San Jacinto River, and the tidal stretches of the Brazos, Neches, and Nueces rivers. 9 Apparently, fewer studies on the effects of petrochemical discharges have been undertaken in Loui­siana; nevertheless, it has been noted that in the lower Mississippi River "the deterioration of water quality in the river has closely paralleled the explosive development of a petrochemical industrial complex."10 Similarly, the Cal­casieu River, into which most of the effluents from the Lake Charles petrochemical complex are discharged, has been the subject of a special study designed to provide guidelines for the revision of existing permits. 11 The enforcement of stricter pollution control legislation during the last decade has reversed the cumulative degradation ap­parent in certain streams before 1970. The limited historical data indicate a steady and rapid increase, especially during the peri­od from 1940 to 1968, in the mean daily loading of biochemical oxygen de­mand in the Houston Ship Channel, 12 but this trend was reversed during the last fifteen years as, first, the Texas Water Quality Board and, subsequently, the Texas Department of Water Resources have en­forced state and, since 1972, federal water pollu­tion control legislation. At­tention has focused upon the oil refineries and pet­rochemical plants along , the channel, and the rela­tive contribution of dis­charges has shifted from industrial and municipal sources. Whereas industrial effluent accounted for 69 percent of the biochemical oxygen demand loading in 1968, in 1976 the indus- TEXAS BUSINESS REVIEW trial proportion of overall effluent, which had fallen by a factor of four, was only 21 percent. These improvements in the control of industrial discharges have produced signifi­cant results in the Houston Ship Channel and a general im­provement of most water quality indicators up to 1976.13 The tidal section of the Neches River below Beaumont also receives large quantities of industrial effluent, almost exclusively from oil-refining and petrochemical installa­tions. The initial moves to reduce pollution in the lower Neches were also taken by state agencies in the late 1960s with the intervention of the EPA after 1972. The revision of waste control orders (discharge permits) in the Beaumont­Port Arthur-Orange area was an early priority of the Texas Water Quality Board, which held a series of meetings with representatives of individual companies during 1968. In 1970 individual dischargers to the Neches River were noti­fied that all companies would be required to attain, by Jan­uary 1973, "excellent" levels of treatment (at least second­ary treatment). The methods by which these standards were to be attained were left to the companies concerned. Since several of the major dischargers were adjacent, cooperative schemes were encouraged by the Texas Water Quality Board. Delays in the introduction of treatment facilities by certain companies kept the two principal communal plants Figure 3 The Photochemical Oxidant Problem in Louisiana Counties not attaining: [J Primary ozone sta~dard ( 1971 and 1979 ) ( EPA designation only) lCj Primary ozone standard ( 1971 and 1979) (EPA and LACC designation ) 60l n l'T'· fT' :t.r?X "O l> :: -r (J"; (/) ...... -'1) = ?. ..... ::c :? l> .t:: l> ...... ...... x < r -< ,.. CJ: ?;) (J) (/) ...... ...., -; ~ -< ,,., cc.,, 1J -; ' -i .... ~ ::t (/) ...... ·:xi ,_,,, l> -t m c ::i::: c: en m ll -t cm 2 2 > . -c: -t < 0 mm 'Tl >< ~ m )> -c: (I) -t (/) -.J -< ­ co 0 z -..i .,, m ;::; -t gi m ll >< m )> (/) en m )> > -t ll (') )> J: ~ c (I) -t 2 Cl> m (') 0 2 0 0 r )> Cl> Cl> .,, 0 Cl> -t )> G') m .,, ~ 0 ~· )> c en: ::! : z -t m11 x-: )> en