A. Federalism in the USA: TheConstitutional and Political Context
The United States of America became the firstmodern federation in 1789 following the failure of the previous confederal formof government established in 1781. At its origin the federation was composed of13 states. Since then it has expanded across the continent and evolved into afederation of 50 states. The United States survived a devastating Civil War,1861-1865, during the first century of its existence, but still operates underthe original federal constitution of 1789. It is, therefore thelongest-standing federation in the world, and it serves as an importantreference point in any comparative study of fiscal federalism.
In comparative terms, the United States ismoderately noncentralized. The major feature of the distribution of powers,which applies symmetrically to all 50 states, is the arrangement whereby theConstitution lists subject matters delegated to the federal government andleaves fairly substantial residual authority to the states. Those powersdelegated to the federal government are mostly concurrent with federal lawprevailing in cases of conflict with state laws. In a few areas the states areprohibited from legislating, thus making these matters in effect exclusivelyfederal. While originally a more decentralized federation than Canada, theextensive exercise by the federal government of its authority in areas ofconcurrent jurisdiction, the broad interpretation of the doctrine of "impliedpowers" in the interpretation of federal powers by the courts, and theextensive use by the federal government of its spending power have resulted ina federation that is now considerably more centralized than the Canadianfederation.
Within the institutions at both levels ofgovernment, the separation of powers between executive, legislative andjudiciary is the prevailing principle, involving a system of checks andbalances among these institutions. The federal Congress includes a directlyelected House of Representatives with representation based on population and adirectly elected Senate in which the states are each represented by twoSenators. The President is also directly elected, state votes being allocatedon the basis of an Electoral College. The lack of party discipline, resultingin part from the separation of powers, has generally given prominence to localand state views in congressional deliberations. The large number of states andthe separation of powers within both levels of government has also lead to adiffused, complex and relatively uncoordinated set of intergovernmentalrelationships.
Although there is no constitutionalrequirement for the federal government to cooperate with the states in carryingout policies in those areas in which it has legislative jurisdiction, inpractice federal governments have chosen frequently to use state and localgovernments as administrative agents, sometimes leaving them considerablelatitude of operation. To influence the application of its policies, thefederal government has relied extensively on conditional grants to the stateand local governments. This has given relations between governments in theUnited States federation a highly interdependent character.
1. Constitutional Status ofVarious Orders of Government
The United States of America consists of afederal government, 50 state governments, 2 federacies, 3 local home-ruleterritories, 3 unincorporated territories, over 130 Native American domesticdependent nations, and numerous municipal (or local) governments.1 All of thefederal and state governments are organized according to the principle of theseparation of executive and legislative powers.
The Federal and StateLegislatures
The separation of legislative and executivebranches of government within the federal and state legislatures, combined withfixed terms of office, has allowed the legislative branch to maintain itsindependence from the executive. The Senate is the Upper House of the federallegislature. It is composed of two Senators from each state, who are directlyelected on state-wide constituencies for six-year terms, one-third beingelected each two years. The Senate has equal power with the House ofRepresentatives, and in addition the power to ratify treaties and certainexecutive and judicial appointments. The prestigious position of Senators makesthem rivals to the President for public attention.
The House of Representatives, or Lower House,is elected on the first past the post electoral system, with the number anddistribution of seats based on population. The electoral term of the House isrelatively short, two years, and the number of members relatively large, at435.
The separation of legislative from executivepower encourages a regime of weak party discipline to prevail throughout thesystem. As a result members of both the House and the Senate are free to formad hoc cross-partylegislative coalitions on an issue-by-issue basis. In a custom referred to as‘log-rolling’, members trade their support for legislation in which they have nocrucial interest for support from other members on legislation in which they dohave a critical interest.
Weak party bonds mean that members of bothHouses are, to a great degree, individual ‘politicalentrepreneurs’.Election campaign costs are high, and candidates are largely responsible forraising their own election campaign finances. Thus, members of both Houses, butespecially Representatives due to their short electoral terms, are constantlyaware of the need to remain attentive to their constituencies. The result isthat a member of either House is highly motivated to ensure themember’s constituencyreceives the maximum benefit from the federal treasury.
The separation of legislative and executivepower allows for the possibility of differing party affiliations between thetwo branches, a pattern referred to as ‘divided government’. As well, it is possible forthere to be differing party majorities in the two Houses of the federallegislature. While such patterns of partisanship can result in legislativeimpasses, in general the two branches and two Houses simply act as ‘checks and balances’ on each others’ actions.
The separation of powers principle is alsoadhered to at the state level. State legislatures are bicameral, except forunicameral Nebraska.2 Governors of states aredirectly elected on state-wide constituencies, while state Senators andRepresentatives are elected directly by district.
The courts are considered the third elementof the system of checks and balances comprising the U.S. governmentalstructure. The Supreme Court of the United States is the only federal courtestablished by the U.S. Constitution.3 It has the power ofconstitutional review and invalidation of any federal or state law which itdeems to be contrary to the federal Constitution.
Constitutional Status ofthe Federal and StateGovernments
The preamble of the U.S. Constitution makesit clear that it is the people of the United States who are sovereign, and itis they who have established the federal Constitution. Similarly, each of the50 constituent states of the federation has a constitution of its own design,the authority for which is derived from the people of the state, not from thefederal Constitution.4
The major feature of the distribution ofpowers is that the Constitution lists matters under federal authority, most ofwhich are concurrent but some of which are exclusively federal, and leaves theunspecified residuum to the states. Administrative authority is allocatedcoincident with legislative authority.
The federal government’s legislative ambit includes: thepower to levy taxes, provided it does not discriminate among states; theexclusive power to negotiate treaties and conduct foreign relations; the powerto regulate foreign and interstate commerce; the principal responsibility fordefence and the armed forces; and the jurisdiction to deal with crimes againstthe United States. The states retain jurisdiction over the greater part of thecriminal law and administration of justice; jurisdiction over the civil law;the responsibility for most domestic functions other than those associated withthe regulation of the economy, including education, health, environmentalprotection and social services; and the power to levy taxes and otherfees.5
The United States’ Constitution makes no referenceto local governments. The organization and activities of local governments aretherefore a subject of the various state constitutions. Consequently, thenature of the relationship between state and local governments, and among localgovernments, varies from state to state.6
2. ConstitutionalAllocation of Revenue and Expenditure Responsibilities and Provisions Relatedto Intergovernmental Transfers
Constitutional Allocationof Revenue
The Constitution invests the federalgovernment with a very broad discretionary revenue-raising power.7 Article One,Section 8 states that “The Congress shall have Power to lay and collect Taxes,Duties, Imposts and Excises…and provide for the…general Welfare of the UnitedStates.” However, as the federal government’s power to raise taxes is notexclusive, states retain the right to levy taxes and to regulate the taxingpowers of local governments.8 Thus, although there are noshared taxes, more than one order of government may exploit the major revenuesources. For example, both orders of government may levy personal and corporateincome taxes, and selective sales taxes.9 The U.S. has a decentralisedtax administration system, with each order of government having its ownadministrative system to collect the taxes it imposes.10
Personal Income Taxes. Both the federal and state governments levy personal income taxes.Individuals complete their federal tax return first; the state tax burdendepends largely on the degree of conformity between the federal and stateincome tax laws. Overall, the federal government dominates the income taxfield. State income taxes tend to be at relatively low levels.
Corporate Income Taxes. Corporate income taxes are levied by both federal and stategovernments. Businesses that operate in more than one state must apportiontheir income among the states.11 Because apportionmentformulas vary from state to state, it is possible to have either doubletaxation of income or to have income escape taxation. A strong case could bemade for uniformity in regard to apportionment, but the federal government hasno constitutional power to enforce such uniformity.
Sales Taxes. Thereis no broad-based consumption tax at the federal level.12 The federalgovernment does, however, impose selective sales taxes. States utilise bothgeneral and selective sales taxes.
In general, the Constitution does notdistinguish between the law-making and spending powers of the federal and stategovernments.13 Due to the large area of concurrent jurisdiction, there isextensive overlap in the jurisdictions of the two orders of government. Inthese areas there is extensive federal funding of matters that lie within thelegislative competence, although not the exclusive competence, of thestates.
There are no provisions in the U.S.Constitution which prescribe intergovernmental transfers. Consequently, therehave been no generalized schemes in the U.S. for vertical transfers or forequalization programs.14 Similarly, there have beenno constitutionally specified portions of federal taxes dedicated to federaltransfers to state governments. Only a few federal taxes, such as fuel andairport taxes, have been designated by federal statute for transfer to state orlocal governments to fund the transportation system.
However, because the Constitution does notprohibit intergovernmental transfers, and because of the broad discretionaryrevenue-raising and spending power of the federal government, an extensive, ifuncoordinated, system of intergovernmental transfers has grown up. State andlocal governments have become heavily dependent on intergovernmental transfersfrom the federal government to meet their financial needs. Such transfers arealmost solely in the form of conditional grants, often with the conditionsclosely specified.
Three sets of objectives have contributed tothe growth of the system of intergovernmental transfers.15 First, theyhave been used by Congress to encourage the states to pursue nationally-definedpolicies. Second, they have been used to support the modernization of stateadministrative systems and thus to support the development of more effectivepolicy. Third, they have been used to assist the states in their institutionof, and continuing participation in, redistributive policies. The latter isnecessary both due to the disparities among the states in regard torevenue-raising capacity, and to federal dominance in the collection of directrevenues, especially income taxes.
Two types of conditional transfers have beenutilised: block transfers and categorical transfers. Block transfers apply tobroad categories of related functions, and impose few restrictions on howstates or local governments allocate funds to activities within the block.Block transfers have been used for areas such as health and socialservices.
Categorical transfers provide financialsupport for specific programs. Formula-based categorical transfers distributeresources to state and local governments according to legislative oradministrative criteria defined at the federal level. Formula transfers includeboth open-ended grants with matching requirements, and closed-ended matchingand non-matching grants. A second type of categorical transfer, project grants,are awarded selectively on the basis of applications.
Federal transfer programs have been used tocover a wide range of government services. The largest have been in the areasof education, health, social services, transportation, environmentalprotection, and regional development.16
A large proportion of federal grants arepassed on from state governments to local governments. In addition, stategovernments provide some own-source grants to local governments.
3. Institutional or OtherSpending Power Provisions
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