The fiscal problems facing all levels of government are daunting indeed. New data has shown that the federal, state and local sectors are facing not only short-term fiscal deficits, but also decades-long fiscal challenges stemming from three common forces: aging, growing health-care costs and a slower growing economy and revenue base.
As they face up to these challenges, governments have several choices:
- Go-it-alone: Each level of government pursues their own policies.
- Fiscal offloading: Each level of government offloads their fiscal problems by passing them off to other levels of government.
- Fiscal collaboration: Governments can join together in developing win-win solutions to common problems.
A go-it-alone approach by each level of government will make hard fiscal choices that much harder. Federal tax cuts, for instance, materially affect the revenues available to the vast majority of states whose income taxes are linked to the federal tax code. The estate tax cut or phase-out in 2001 caused a large revenue hole for states that had relied on a cooperative federal-state framework for decades to enforce the state portion of the estate tax. Conversely, recent state cuts in staff have affected federal programs, such as disability determinations for social security.
Fiscal offloading includes unfunded, underfunded mandates and other cost-shifts to states and localities by the federal government. The George W. Bush administration's Real ID Act would have cost states $11 billion if they didn't fight back, and the new block grant proposals for Medicaid in Washington would constitute a massive cost-shift to states unless they find ways to cut clients and payments to doctors.
Go-it-alone and fiscal offloading strategies reflect a general lack of regard for the effects of policy on other government entities, resulting in higher costs as well as public confusion and skepticism over the effectiveness of government. The effects on state and local officials are underscored by their struggle to meet higher costs induced by the federal government at a time of historic budget cutbacks.
Washington pays a price for going it alone as well. It gets substantial assistance from state and local partnerships in programs ranging from Medicaid to environmental protection, entailing shared resources and expertise. Unilateral federal actions jeopardize state and local partnerships that are essential to the successful implementation of nearly all federal domestic initiatives.
When all governments in our federal system suffer from common maladies, joint solutions are preferable. One example of how fiscal collaboration might produce a win-win outcome involves the consideration of a consumption tax, or a value-added tax (VAT). The United States is the only major advanced nation without a national consumption tax. When compared with state sales taxes, a VAT has several advantages, including a national and international reach into the service economy, and revenue potential that could go a long way toward filling fiscal gaps at all levels of government.
Absent an intergovernmental partnership, however, states stand to lose a lot if a national consumption tax is implemented. For one, a comsumption tax would undermine state sales taxes.
Still, as Australia has shown, a national government can adopt such a tax with state and local governments sharing in the gains. States can piggyback on the expansive national consumption tax base, replacing their own declining sales taxes with a far more productive tax. An intergovernmental dialogue and a real policymaking partnership could lead to adoption of a consumption tax in this country that satisfies the fiscal interests of the entire public sector.
Sadly, notwithstanding the payoff from collaboration, I would not bet the house on it. Simply put, our collective capacity to work together in developing common policies across our federal system has sunk to record lows. At the federal level, the following is a list of the intergovernmental institutions that had the capacity to examine and resolve intergovernmental conflicts in 1980: the Advisory Commission on Intergovernmental Relations, the Office of Management and Budget's Division of Federal Assistance, House and Senate Subcommittees on Intergovernmental Relations, the General Accounting Office's unit on intergovernmental relations and the Congressional Budget Office's state and local cost estimates.
Today, only the latter two remain. The White House continues to have intergovernmental liaison offices, but these are widely acknowledged to be short-term firefighters set up to gain political support for the president from state and local officials.
State and local governments' capacity to work proactively with federal officials has also weakened. Their interest groups in Washington are increasingly plagued by divisive polarization among their members that undermines their ability to even take positions on such measures as the president's health reform and other important legislation affecting the federal system.
This contrasts distinctly with other federal systems. Australia has quarterly meetings between national and state leaders, while Canada has semi-annual conferences. Some of us hoped that the president's deficit reduction commission -- the Bowles-Simpson Commission -- might set a new trend, but were disappointed by the absence of any state or local elected officials. While presidents, governors and mayors like to talk about policies and ideas, they had better start focusing on the unglamorous role that institutions play in keeping our federal system alive during the hard times ahead.