New Intergovernmental Forums Needed to Address 21st-Century Challenges

In spite of the importance of intergovernmental collaboration, at present an effective, institutional framework does not exist to promote the necessary dialogue and partnerships across governments.
by | June 21, 2006

As we enter the 21st century, the nation faces a host of major governing challenges prompted by globalization, advancing technology and rising structural budget deficits. As we grapple with the implications of these issues, we should add another important challenge -- increasingly, public policy challenges are shared across all levels of government in our system.

Regardless of the purported devolution of authority that has occurred selectively in recent years, the delivery and financing of public services has become more intertwined than ever before. Employing over nine times the number of employees as the federal government, state and local governments have continued as the real workhorses of our system, serving as vital partners in the implementation of most major federal programs, whether it be for welfare support, health care or environmental protection. Since 2000, the federal reliance on the capacities of state and local governments has, if anything, accelerated as former bastions of state and local autonomy, such as elections administration, fire departments, education quality and motor vehicle licensure, have been swept up in new federal programs.

In spite of the importance of intergovernmental collaboration, at present an effective, institutional framework does not exist to promote the necessary dialogue and partnerships across governments. Although the former Advisory Commission on Intergovernmental Relations was originally established to address intergovernmental problems and concerns from a neutral perspective, it was eliminated in 1995, and no similar forum has replaced it. While shifts in our economy, demographics and political system are posing new challenges, we no longer have institutional opportunities for officials to meet collectively to discuss agreements that cross governmental and sectoral boundaries.

Very few issues better illustrate the intergovernmental challenges we face -- or the need for forums to debate these issues on a collaborative basis across levels of government -- than trends in our tax systems. Defining the essence of governmental capacity, revenue systems are being challenged by unprecedented economic and social changes. The aging of our population will place growing expenditure pressures on all levels of government, leading to structural federal and state fiscal imbalances. Yet, these demographic forces as well as broader economic forces will increasingly undermine the revenue capacity of our current tax system to finance these burgeoning demands. Thanks to globalization and advancing technologies, economic transactions more easily flow across boundaries; yet, fragmented and inconsistent tax systems among the states or even nations will complicate the financing of public services and increasingly serve to undermine economic productivity and growth. The sales tax alone will yield diminishing revenues as a growing share of economic activity is comprised of untaxed services and sales through remote Internet and mail order sales.

Intergovernmental cooperation is vital to enable governments at all levels to cope effectively with the implications of these changes. Greater cooperation among governments that share common tax bases, such as the income tax, can ease taxpayer burdens while collaboration and even harmonization of inconsistent tax bases for sales taxation can improve tax administration and promote greater economic efficiency.

However, in our system, tax policy is too often formulated unilaterally. Recent federal tax policy changes, including changes to depreciation schedules and the estate tax, have caused many states to decouple from federal tax bases in order to maintain revenues. The unraveling of shared tax bases complicates the tax system, increases burdens facing taxpayers, and unwinds a tax administration and enforcement partnership that took years to develop. Moreover, the pace of tax preemptions has accelerated in recent years. Federal courts have constrained the scope of state sales taxes by excluding taxation of goods produced by sellers located outside the state; Congress has further banned states from taxing access to the Internet. Thus, while continuing to place greater spending responsibilities on the states through mandates and other actions, the federal government is simultaneously limiting state and local revenues available to finance these programs.

To address issues like these, the National Academy of Public Administration recently worked with state and local government organizations to convene a series of forums on key policy issues affecting all governments in our system. The first forum focused on intergovernmental tax issues. Federal executive and congressional officials, as well as officials from state and local governments and tax policy experts, participated. (Full disclosure: I chaired the first forum, which was facilitated by Governing's Peter Harkness).

The NAPA report based on this forum is still in draft; its detailed findings and recommendations are being reviewed by forum participants and other commenters prior to its publication in several weeks. At the broadest level, the forum concluded that significant tax reform and renewal should be done on a "whole of government basis" through a truly collaborative process, with all governments having a seat at the table. The dialogue begun by this forum needs to become institutionalized through the establishment of a neutral focal point to periodically bring together all levels of government to engage in dialogue, deliberation, and consensus building. For such a process to work, state and local governments must be viewed as more than "just another interest group" -- instead they must be considered as vital partners in making the intergovernmental system work for the twenty-first century.

While the federal government must be a key player in bringing about tax collaboration, state and local governments themselves will also need to substitute cooperation for competition in the interests of pursuing greater harmonization of their own tax systems, whether it be in the sales taxation of remote sellers or in business taxes on multi-state enterprises.

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