A Trail of Broken Premises: Challenges Facing Fiscal Federalism in the United States
by Vic Miller for The National Conference of State Legislatures
November 2006
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Preface
The U.S. federal system is the most effective and versatile in the world. Without constitutional changes, we have evolved from a system of virtually no federal domestic activity to one where the federal government seems omnipresent.
The vibrancy and effectiveness of this system is being challenged. Enormous strain has been placed on states by a national government that enacts initiatives and finances them from state resources. From the No Child Left Behind Act to homeland security to Medicare Part D to Medicaid, the federal government is placing national constraints on how state and local governments are permitted to act, and on how they use their own-source revenues.
Fiscal federalism in the U.S. has always been based on the concept of shared objectives between the federal government and the states. Historically, some federal support was general purpose aid, as the federal government acknowledged its continuing role of basic support for government in the U.S. Some of it was highly specific. Most of the aid recognized both the federal interest and the wisdom of allowing fifty states in fifty circumstances to make final judgments as to the most appropriate programmatic structures for their circumstances.
The premises upon which this structure of fiscal federalism was built have begun to fray. In most cases, general purpose aid has vanished. In addition, support for state-federal partnerships has experienced three significant changes. First, more federal money to states supports individuals rather than the governments that serve them, and in increasingly prescribed fashion. Second, federal assistance to states overall requires a greater state match when compared to previous decades. Finally, increasingly greater programmatic responsibilities have been shifted to state and local governments without concomitant resources.
This paper documents and profiles selected actions taken recently at the federal level that are changing the relationship between states and the federal government. The Medicare Part D “clawback,” mandated increases in Medicaid support for Medicare, reductions in block grant funding, diminishing federal commitments to non-transportation infrastructure, passing down of inflation and fixed costs, changes to matching rates, reconciliation savings targets that zero in on state-federal programs, increased earmarking, funding for natural disasters and the gnawing problem of unfunded federal mandates are among the issues reviewed and analyzed herein.
The paper provides plenty of examples of fiscal federalism’s changing face—legislative enactments, budget reconciliation program changes, cost shifts, unfunded federal mandates, reduced financing without reduced responsibilities, etc. If left unchecked, states will find that their budgets and tax systems serve at the mercy of federal policymakers regardless of the Tenth Amendment or any notion of federalism. In short, the premises of federalism upon which this Nation has been built are being challenged, and these challenges should be thoughtfully addressed.
I would like to thank the National Conference of State Legislatures for the opportunity to present the ideas in this paper. In particular, I would like to thank Michael Bird for his collegial interaction in the paper’s conception and his editorial contributions in its production.
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