Local Services in the New Federalism: Discussion

Abstract

The paper by Hushak undertakes the difficult task of assessing the history of U.S. fiscal federalism and of addressing the implications of the current era of reduced state and federal intergovernment revenues for local government. It is hard to argue with the conclusion that property taxes, user charges, and bonds will remain the major source of local revenues, given the limitations on revenue options and local governmental needs for operating funds. However, continued reliance on these traditional funding sources does not preclude local governments from seeking to become more efficient and finding alternative mechanisms for providing local services. In developing the motivations for the current brand of New Federalism, Hushak argues that the reduction in federal intergovernmental aids is a response to excessive federal participation in financing local government services where the perceived marginal social value of output is less than the marginal social cost. This perception of a social product worth less than its marginal social cost, along with a general disenchantment with big government, certainly has contributed to the effort to curtail government. However, as these cuts work their way through the system, we are getting evidence that reality does not match perceptions. In response to the reduction in federal assistance, many states apparently are deciding that marginal social benefits of some government services are greater than their costs and they are raising taxes in order to continue providing services. Many local governments face similar situations. Hushak's presentation focuses on revenue sources and does not include information on local expenditures. The contrasting pattern of local government expenditures to the financing patterns provides a lesson in the issues and problems of the New Federalism experiment. Expenditure by a unit of government is a generally accepted proxy for the extent to which that level of government provides the service. Based on data from the Advisory Commission in Intergovernmental Relations (ACIR), local governments were the dominant provider of fire protection, sewage, other sanitation, local parks and recreation, police, library, and local education. State government led in spending for higher education, corrections, highways, and noncash public welfare. The federal government was first in the domestic functions of natural resource development, water and air transport, special education, services, health, and cash public welfare. For these services, local government accounted for 43% of direct expenditures, state government for 27%, and federal government for 30% of the total. However, the responsibility for financing the provision of these services is often shared with other levels of government and with the imposition of varying degrees of control on the recipients. Based on ACIR data for seven major governmental functions, the federal government was the chief financier of natural resources, public welfare, housing and urban renewal, and air transportation. States were the most prominent funder of education services and highways. Funding of health and hospitals was shared about equally among all three levels. As the major beneficiary of federal and state grants, local governments were the sole or principal funding source of none of these particular governmental functions. Although data availability limited the number of functions to seven, a comparison of the total financing capacity with the expenditure capacity indicated that the federal government dominated in the financing role (40%) while local g vernment dominated in the direct expenditure role (47%) (ACIR). This discrepancy within a jurisdiction between the level of financial support provided and the level of responsibility for providing local services is at the crux of the problem with the New Federalism. States have long wanted the ability to decide how federal funds Daniel Otto is an assistant professor, Department of Economics, and an extension economist, Iowa State University.