As was mentioned above, the United Stateshas a relatively decentralized system of expenditure provision. This is trueeven for redistributive programs such as the former Aid to Families withDependent Children program, the current Temporary Assistance for Need Familiesprogram, and Medicaid. Two notable exceptions are the Food Stamps and Medicareprograms, which are federal. The federal government does attach conditions whenfinancing redistributive programs. Nevertheless, the states have a great dealof discretion in the design of the programs, which results in citizens residingin different states having access to different levels of service. Some mayargue that this is not very equitable and should be corrected by the federalgovernment assuming a greater role in the design and implementation ofredistributive programs. Others, on the other hand, have argued strongly thatachieving more equity detracts from efficiency in the abilities of the statesto provide services that respect the preferences of their citizens.
On the revenue side, we already mentionedabove that the federal government has a dominant role in the United States inlevying redistributive taxes such as the personal income tax. This allows forgreater redistribution because a large federal role mitigates thestates’ abilities tocompete for mobile tax bases. It does not eliminate tax competition completely,however, since the states do have access to the income tax base.
Redistribution not only applies toindividuals; it also applies to state and local governments. The issue ofwhether the federal government should redistribute economic activity acrossstates is a hotly debated one in the United States. Because states differ intheir abilities to provide goods and services, individuals in similarcircumstances will necessarily be treated differently across states. Those infavour of redistribution argue that all citizens of similar economic statuswithin a federation should have access to similar public goods and services atsimilar tax levels. These people would thus argue for a strong federal role inredistribution across states. This argument has, however, had relatively littleimpact on the design of intergovernmental transfers in the United States. As wehave noted in earlier sections, there is no explicit system of equalization inthe United States. There are, however, equalization-type components imbedded inthe system of grants-in-aid. Those opposed to redistribution across statesargue that states should receive “fair” treatment from the federal governmentin the sense that what each state pays in taxes should equal what it receivesin expenditures. Furthermore, they argue that redistribution exacerbatesinequities and inefficiencies by encouraging poorer individuals to stay inpoorer regions.
1. Impact onStability
The process of intergovernmental relationsand fiscal arrangements has been both a stabilizing influence and a source ofconflict in the United States.
Areas of Consensus. Lack of Equalization: One area in which a consensus exists isin attitudes to a generalized equalization program. No such program exists, andnone is contemplated. The U.S. is, among federations, exceptional in thisregard. While the scope of equalization transfers in federations varies, it isnoteworthy that all other developed countries utilising a federal system ofgovernment have some type of equalization system. The lack of such a program inthe United States cannot be attributed to a lack of need for such a system,based on a dearth of horizontal fiscal inequities. In fact, horizontal fiscalinequities among U.S. states are of the same order of magnitude as amongCanadian provinces.37 Explanation of the absenceof an equalization program may be attributable to cultural factors, discussedbelow.
Areas of Dispute.Goals of federal spending:There is no consensus in the U.S. as to whether it is a goal of the federalfiscal transfer system to redistribute economic activity across states, orwhether such redistribution is merely an unintended consequence of decisions taken with othermotivations.38 Three differing conceptions of the federal financial role can bedetected in different parts of the ongoing debate.
One political conception of the federalfinancial role is that federal transfers should be designed to be neutral across states;i.e., that each state should get back a close approximation of what it pays in. Under this conception, thefederal government’s role is to operate a unified tax system, but not toredistribute the collected resources via the federal fisc.
A second conception of the federal financialrole is that the federal fiscal transfer system should be designed to redistributeresources among the states.This conception prescribes that the federal government should use resourcesavailable from states with higher per capita incomes or stronger economies tofinance programs that less wealthy states would be unable to support usingtheir own resources alone.
A third conception of the federal financial roleis that net redistribution of resources and economic activity among states isallowable as long as it is an unintendedconsequence of individual programs designed to achieveimportant federal purposes. This conception prescribes that programs should befinanced through a unified tax system, but that program spending should belocated wherever activities need to be, or best can be, carried out; programspending would thus be ‘blind’ toany redistributional effects.
Given this lack of consensus as to the goalsof federal transfers, it is no surprise that concerns about whether statesreceive a ‘fair’proportion of federal expenditures, or pay more than their ‘fair’ share in federal taxes, havebecome a prominent feature of political debates at the federal level. That is,as participants in policy debates have differing conceptions of the goals ofthe system, they differ as to their evaluations of what is ‘fair’. Consider, for example, thepolitical difficulties involved in designing a new welfare system to replacethe AFDC (Aid to Families with Dependent Children) program.
The AFDC program, a categorical transferprogram, was in 1996 converted to a block transfer program and renamedTemporary Assistance for Needy Families (TANF). Under TANF, the states weregiven almost total discretion to set program rules; thus, there is relativelylittle policy to be set at the federal level, other than the distribution offederal funding levels among states. Consequently, one of the most contentiousissues in designing TANF became finding ‘fair formulas’ to allocate and distributefederal transfers.
Some wealthier states argued that fairnessprescribed that future allocations should be based on past allocations. UnderAFDC, state contributions were matched by federal transfers, so that states hadan incentive to contribute more. If the new block transfers were distributedbased on prior year allocations, states that were receiving a relatively largeamount of federal support because of their own spending would continue toreceive higher funding. This would persist even if they subsequently cut theirown contributions.
Many poorer states took a different view ofwhat would be a fair allocation. At one point, a group of 30 Senators from the“Sunbelt” states proposed a formula that would have taken child poverty ratesand the size of the state into account. Under this formula, more money wouldhave been directed to southern states and states with small populations.Wealthier states, that had been able to afford higher own-source funding underAFDC, would have experienced a commensurate drop in federaltransfers.
In the end, a compromise involvingtransitional measures was agreed upon. What the TANF debate demonstrates isthat without political agreement on the goals of federal transfers,determination as to what constitutes a ‘fair’ funding formula must be made on acase-by-case, ad hocbasis.
Beyond the difficulties involved informulating ‘fair’rules for transfers given a lack of consensus of the overarching goals of thetransfer system, are the problems associated with the uncoordinated nature ofthe transfer system. As the system is not often considered in its totality, butrather only on an issue-by issue or program-specific basis, policy debates areplagued by misconceptions as to the actual redistributive effects of federaltransfers. For example, it is commonplace for citizens and even policy-makersto consider the large cities of the north-east and Great-Lakes regions to bebeneficiaries of federal transfers due to high welfare costs; in fact, however,the states of the north-east and Great Lakes regions are net contributors tothe federal revenues while many Sunbelt and western states are netrecipients.39
Unfunded Mandates: Mandates is a broad term used to referto a number of different tools used by the federal government to regulate theactivities of state and local governments.40 Four types of tools arerelevant to the discussion of fiscal federalism. First, there are theprogram-specific conditions attached to conditional transfers. Theserequirements, attached to major fiscal assistance programs, demand significantfiscal and policy actions by state and local governments. As we have noted,while it is technically possible for state and local governments to avoid theconditions by non-participation in a program, this is not practically feasiblein the case of the major programs. Avoidance is also made more difficult by thenext two types of mandates.
Second, there are ‘crossover sanctions’. Such sanctions link compliancewith conditions of smaller programs to the continued receipt of funds fromlarger programs. They may mandate a withdrawal of all or a portion of a federaltransfer; for example, federal funding for highways is dependent upon a statemaintaining a minimum legal drinking age of 21 years.
Third, there are ‘cross-cuttingrequirements’ attachedto many transfers. Technically, these are conditions of transfers as well.However, these cut across policy areas, making it difficult for recipientgovernments to avoid them. The stipulation that capital funding on anyfederally-funded facility is dependent upon the facility being accessible tothe disabled is an example of such a cross-cutting requirement.
Fourth, there are direct orders. These areseen as the most coercive of mandates, and involve federal direction ofpolicies or programs to be carried out by state or local governments.Typically, these carry criminal or civil sanctions for non-compliance. Examplesinclude federal labour and environmental standards.
State and local officials oppose mandatesprincipally on three grounds.41 First, they argue thatmandates distort their priorities by tying up resources to comply with federalpriorities. As the ability of state governments to respond to state prioritiesis diminished, they argue, the political viability of state-order government isundermined. Second, mandates carry non-fiscal implications for state and localgovernments. It is argued that the initiative of these governments toexperiment with innovative approaches to policy problems is diminished. Third,it is argued that mandates serve to undermine accountability. To the degreethat mandates are ‘unfunded’,federal legislators are free to enact benefits without facing the concomitantpolitical pressures associated with paying for them.
Supporters of mandates counter with fourarguments. First, they argue that states, if left to their own devices, wouldprovide inadequate levels of funding and services to what have been identifiedas national priorities. They believe a federal role is thus justified in suchareas as assistance for those with disabilities or protection of theenvironment. Second, economists argue that federal action is necessary due tospill-over effects. Federal regulation prevents states from exporting costs inpolicy areas such as higher education and environmental protection. Third, itis argued that the U.S. needs a national system of regulation of corporateactivity, as it has developed a nationally integrated economy. Federalregulation is seen as necessary to prevent ‘jurisdiction shopping’ by corporations. Fourth, it isargued that the U.S. has become a national community, with expectations ofcommon levels of public services and benefits. It is thus argued that only thefederal government can avoid a patchwork of services.
The significant use of mandates began in the1960s, and continued through the 1970s. The Reagan administration amelioratedthe effects of unfunded mandates in the 1980s by requiring all executiveregulations to undergo cost-benefit analyses. However, the number of mandatesimposed by Congress continued to grow, and the fiscal pressures related to therecession of the early 1990s led to high-profile protests by state and localgovernments against unfunded mandates. A coordinated National Unfunded MandatesDay, first held on October 23, 1993, received wide-spread pressattention.
The federal legislative response to stateand local protest was the Unfunded Mandates Review Act of 1995. In theaftermath of the Act, some unfunded mandates were reversed, and new mandateswere modified.42 However, as the Act coversonly one of the four types of mandates identified above, i.e., direct orders,the political debate on mandate issues can be expected to endure.43
Ability to Adapt to Changes. The U.S. fiscal transfer system has shown a remarkable ability toadapt to changing circumstances. As we have noted, the matrix of connectionsamong legislators, administrators, and executives in all three levels ofgovernment produces an uncoordinated but flexible system. The federal Congress,as a site for lobbying by agents of state and local governments, is able toincorporate regional views in its decision-making processes.
The noncentralized character of U.S.federalism has allowed the locus of legislative and administrativedecision-making to evolve over time. Periods of more centraliseddecision-making, such as that induced by the crises of the Great Depression andthe Second World War, have alternated with periods of greater legislative andfiscal decentralization, such as the period beginning in the 1980s. Suchflexibility has been facilitated by the Constitution’s provision of extensive areas ofshared jurisdiction.
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