As noted above, the federalgovernment’sexpenditure powers, “to provide for…the general Welfare of the United States,”are very broad. Thus, there are no legal limits or interdictions on the objectson which the federal government may spend its own-source revenues.
The courts have supported a broadinterpretation of the federal government’s revenue-raising and expenditurepowers.17 Courts have upheld the federal government’s rights to these powers in regardto areas of both concurrent and exclusive state jurisdiction. Because theConstitution does not list powers specifically reserved to the states, the onlyprovision protecting the position of the states is the Tenth Amendment, whichprescribes that “powers not delegated to the United States by the Constitution,nor prohibited by it to the States, are reserved to the States respectively, orto the people.” Neither this constitutional provision, nor court rulings basedupon it, have been taken to prohibit federal spending in areas of exclusivestate jurisdiction.
Two features of the U.S. use of the federalspending power are particularly notable. First, the unsystematic use ofconditional transfers produces an uncoordinated, complex web ofintergovernmental transfers. Second, the Congress has in the past actedunilaterally to mandate that states or local governments establish programs forwhich the federal government has not allocated funds. These ‘unfunded mandates’ became highly controversialpolitically in the early 1990s, and have subsequently been indecline.
4. Political and LegalDynamics –Including the Role of Law and Role of Politics in the Decision-MakingProcesses
The United States ranks as one of the mostculturally homogeneous federations. While it has substantial black and hispanicminorities, in no state does either of these groups constitute a majority.There are some regional variations in political culture, but generally there isa substantial belief in the benefits of the dispersal of governmental power. Itis the latter which supports the persistence of U.S. federalism.
The amendment of the federal Constitutionrequires the consent of both a majority in the federal Congress and a majorityof the state legislatures. This process has proved to be relatively rigid inpractice: after the first ten amendments were agreed during the ratificationprocess and enacted in 1791, there have only been seventeen other successfulamendments in the ensuing two hundred years.
As American society has evolved over the lifeof the federation, and as the text of the Constitution has remained relativelyunchanged, other devices have been developed to allow the federation to adaptto new circumstances; intergovernmental relations is one of thesedevices.
Intergovernmental relations in the U.S. arebest conceived of as a matrix of connections. Legislators, administrators, andexecutives in all three levels of government interact in an uncoordinated butongoing basis. The federal Congress is a site for lobbying not only by societalinterest groups but also by agents of state and local governments. Theseparation-of-powers model of governance allows a lack of party discipline topermeate the system. As a result, state and local views can be accommodated inthe process of congressional deliberations.
However, to see the federal capital as thecentre of decision-making would be to misunderstand the system. It is becausethe decision-making networks are not necessarily centred on Washington thatU.S. federalism has been described as not only decentralised, but as‘noncentralized’. The locus of decision-making can shift over time due to theextensive area of effective concurrency of constitutionaljurisdiction.
Extensive areas of shared jurisdiction thusallow for a degree of flexibility as to where legislative and administrativedecisions are taken at a given time. The U.S federation underwent a period ofcrisis-induced centralization in the 1930-45 period spanning the Depression andWorld War II.18 The states proved unable to deal with the economic disruptions ofthe Great Depression. President Roosevelt’s ‘New Deal’ brought explosive growth inunilateral federal actions, as well as in federal-state and federal-localco-operation. The basic outlines of the U.S. welfare state were defined duringthis period. The post-war period, from 1945 to the early 1960s was a period ofconsolidation, but little further federal expansion. The Johnson administrationof the mid-1960s brought another period of new social policy initiatives fromthe federal government. The ‘Great Society’ initiative was embodied in a host of new federal programs; newfederal agencies undertook to implement these programs on the basis of aconception of national needs and priorities.
The perception of the failure of many of the‘GreatSociety’ initiatives,combined with the disillusionment caused by the Vietnam War and Watergatecrises, led to a turn back to state powers beginning in the mid-1970s. The Fordand Carter administrations made some attempts to come to grips with this trend,but it was the Reagan administration that pushed the decentralist agenda.Transfer programs were restructured and cut back, and regulations associatedwith state receipt of federal funds were reduced. States responded by becomingstronger initiators of government services. These trends continued through theBush and Clinton administrations.
In the latter 1990s one symptom of thedecentralist trend has been the conversion of some categorical transfers toblock transfers. In the mid-1990s, for example, one of the longest-runningwelfare state programs, the federal Aid for Families with Dependent Children(AFDC) program, established in 1935, was dismantled and replaced by a blockgrant program (see Section C, 1(b) below).
Role of Law in theDecision-Making Process
As noted, the non-constitutional processes ofshifting of responsibilities according to the principle of concurrency and thenoncentralized bargaining processes of intergovernmental relations have playedthe largest role in the resolution of issues affecting both the overall federalsystem and the fiscal arrangements within that system. However, the courts, asthe third element of the federal system of checks and balances, have alsoplayed a significant role in the evolution of U.S. federalism.
While the U.S. Supreme Court was establishedby the Constitution, its power of judicial review, that is, the power to reviewthe constitutional validity of acts of Congress and the state legislatures, wasnot explicitly provided for by the Constitution.19 The Court itself laid claimto the power of judicial review in a landmark decision in 1803.
Over the years the U.S. Supreme Court hasbeen important in setting the legislative boundaries between the national andstate governments. While there have been some important exceptions, in generalthe Court has been very sympathetic to the idea of a powerful nationalgovernment. In the 1810s and 1820s, the Court established, via a series ofdecisions, Congress’sauthority to manage the national economy. In the late 19th century, the Congress established theInterstate Commerce Commission and passed legislation outlawing monopolies;both helped the federal government establish itself as a major actor in thenational economy, and both were upheld by the Court.20 In the early20th century, the Courtinitially denied both orders of government the right to regulate conditions ofwork, citing the doctrine of economic laissez-faire; when the right was finallygranted, however, it was held to be within federal jurisdiction.21 After aconstitutional contretempswith President Franklin Roosevelt, in the 1930s, over the rights of the federalgovernment, the Court endorsed the federal government’s right to regulate the market,redistribute income, create a modest welfare state, and manage the relationshipbetween workers and employers.
The most dramatic Court-supported expansionof federal power came in the early 1960s. The federal government had beenhesitant to challenge the system of state-sanctioned racial segregation thatoperated in the southern states, in part because it believed it lacked thejurisdiction to enforce civil rights. In 1964, however, the Congress used itspower over the regulation of interstate commerce to ban discrimination,claiming that it substantially affected such commerce. The Supreme Court notonly accepted that rationale, but interpreted so broadly what it meant to‘affect interstatecommerce’ that bothCongress and state legislatures concluded that the Court would allow thefederal government virtually unrestrained rights to regulate in thisarea.
In a 1985 decision, the Garcia case, the Court repudiated itsrole as the adjudicator of disputes between the states and the federalgovernment, noting that the states should look to the political process fortheir protection. The Court has since moderated this extreme position; however,the long-term record of the Court remains one which indicates a generalpredisposition to support the expansion of federal power.
The U.S. Supreme Court does not acceptreference cases; in a 1911 decision it rejected an attempt by Congress torequire it to undertake such a task. It retains a strictly adjudicatory power,refusing to determine questions of constitutional validity not arising out ofconcrete disputes.22
Appointments to theAppeal Courts
Appointments to all federal benches are madeby the President, subject to ratification by the Senate. While appointments tothe lower federal courts are generally uncontroversial, Supreme Courtappointments have become increasingly contentious. Presidents regard theappointment of Supreme Court Justices as an opportunity to entrench theirpolitical philosophy in government in a way that will outlast their own term inoffice. As most Supreme Court nominees are sitting appellate court judges, theyhave a long history of judgements. The Senate ratification hearings are thusoccasions of high political drama, in which the nominee’s judicial record, personalqualities, and political leanings are closely examined.
Role of Politics in theDecision-Making Process
Decisions concerning the use of the federalpower to spend in areas of concurrent or exclusive state jurisdiction do notrequire any special procedures.23 Thus, decisions aboutfederal spending in these areas has rested with the Congress and the President.The Congress has not considered itself restricted by any extra-legalprinciples, such as federalism, when deciding on the use of its spendingpower.
The noncentralized nature ofintergovernmental relations in the U.S. means that there is little overallcoordination between the two orders of government in regard to the design ofprograms involving the expenditure of federal funds. The diffusion ofpolicy-making in both orders of government due to the institutional separationof powers, the large number of states, and the lack of any formal, high-levelintergovernmental linkages all play a part in fostering uncoordinated programformulation. As there is no constitutional or statutory provision for a rolefor the states in decisions regarding the use of the federal spending power,state and local government representatives participate in lobbying the Congresson its decisions relating to the federal spending power along with a widevariety of other interest groups.
Ultimately, the acceptance or rejection offederal financial transfers is a decision left up to the states. However, thereis no system in place which would allow a state which decided to opt-out of aprogram to receive financial compensation. In practice, therefore, opting-outof a significant federal grant program has not been a realistic option forstates. Some states do, however, effectively opt out of some smaller projectgrants by simply declining to apply.
5. Transparency andAccountability
As noted above, the federal government hasconsiderable discretionary power in both revenue-raising and expendituredecisions, and has chosen to spend in many areas of both concurrentjurisdiction and exclusive state jurisdiction. An uncoordinated, but extensive,system of intergovernmental transfers has developed. This combination conducesto a system with both low transparency and low accountability.
Consequently, there has been a high degree ofconcern in the U.S. literature on fiscal federalism around the principle offinancial responsibility.24 It is often argued that theachievement of political accountability depends upon adherence to the principlethat the order of government that raises revenue should be the order ofgovernment that determines how that revenue is expended.
It is to be expected that this would be aparticular concern in a separation of powers system. In a parliamentary system,accountability for funds transferred intergovernmentally is enhanced as theexecutive in receipt of the funds is directly responsible to a legislature andthus to an electorate. In the U.S. system, however, the executive branch has nosuch direct responsibility.
The mechanism used to compensate for thislack of accountability at the state level is the conditional transfer. As thefederal government has raised the funds that are transferred, it maintains itsaccountability for those funds by setting conditions on how the state or localgovernment may expend them. Thus, currently virtually all federal grants tostate and local governments are conditional in form. The trade-off for thislevel of accountability is decreased state autonomy. To the extent that thespending priorities established by the federal government do not coincide withstate priorities, but states accept the conditions in order to access thefunds, state autonomy is undermined.
One benefit of the extensive use ofconditional grants is a higher degree of transparency than is found in someother federations. While we have noted that U.S. intergovernmental relationsconstitute a complex web, the adherence, to some degree, to the principle offinancial responsibility means that citizens have been able to identify thefederal government’sresponsibility.
B: Summary of Federal, State, and LocalBudgetary Relations in the United States
In this section, we describe the trends inthe evolving division of responsibilities for expenditures and revenue-raisingof the federal, state, and local levels of government in the UnitedStates.
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