Idris El-Radi —  November 29, 2012

There are approximately 80,000 local governments in the United States, plus fifty state governments and the national government. These governments often get in each other’s way, and the taxpayer is frequently a prime victim. The multiplicity of governments is called, half in jest, “balkanization,” after the many little countries that emerged in the Balkans when the Turks were pushed out in the last century. Balkanization in the United States has led to immoderate jurisdictional conflicts over whose rules apply in which situation.

One difficulty is the size of American cities and counties. Since World War II, much of the middle class has moved from cities to suburbs, leaving the cities with a shrinking tax base precisely when poorer people—who cannot pay much in taxes but need many social services—are moving in. If the entire metropolitan area had a single government, the affluent suburbs (many of whose residents earn their liv­ings in the city) could be taxed to share the burden. But suburbs, with their own representatives in state and federal legislatures, block such moves, and the cities be­come poorer, more blighted, and more desperate. Parts of New York City look as if they’ve been destroyed in a war. Instead of solving their own problems on a met­ropolitan basis, the cities tend to go hat in hand to Washington to ask for financial help. As things get worse, more of the middle class and more of industry move out, deepening the problems.

The Growth of Federal Power. The Founding Fathers would have difficulty rec­ognizing the balance of powers between state and federal governments today. They expected, first, that the amount of actual governing would be small, and second that most of it would be done by the states under their “reserved” powers. For most of the nation’s history this was so. States and localities raised their own revenues and spent them on modest programs; federal help was minor. As late as 1932, fed­eral grants were less than 3 percent of state and local revenue.

But things were changing. The passage of the Sixteenth Amendment in 1913 allowed the federal government to tax income. Although little used at first, it meant that Washington had at its disposal an extractive power much stronger than the states’. Soon small federally funded programs for highways, education, and public health appeared. With Franklin D. Roosevelt’s New Deal in the 1930s, fed­eral programs increased in number and funding. With Lyndon Johnson’s Great So­ciety in the 1960s (Johnson was a great admirer of Roosevelt), federal programs ex­ploded. Now, many billions of dollars flow from Washington to state and local governments. States and localities came to depend on federal grants for a portion of their revenues.

State and local governments often don’t like being dependent on Washing­ton, but they need die money. It’s easier for the federal government to collect taxes through its progressive income tax (the richer you are, the bigger percentage you pay) than it is for states and cities through their income, sales, and property taxes. The public demand for services has outstripped the financial ability of most states and localities- Theoretically, states and cities could decline federal grants, but no one likes to turn down offers of money, even if there is some red tape involved.

The net impact was a growth of federal power. Because it provided money, it could set standards. The content of school lunches; design and construction of hospitals, highways, and airports; and women’s collegiate athletics come under fed­eral supervision. Some have suggested that this development makes the United States less federal than it used to be. Perhaps so, but reversing the process is diffi­cult. Should toxic and nuclear waste disposal be left to state discretion? Is educa­tion a purely local concern? Standards and dollar support vary wildly across the fifty states, leaving the U.S. population inadequately educated.

The New Federalism. The federal grants process is terribly complex, consist­ing of some five hundred different programs. Firms offer computerized grant-find­ing services, and states, cities, hospitals, and universities hire people for their “grantsmanship”—their ability to locate and win grants. Further, most of these grants are “categorical,” aimed at a specific problem, which takes control and dis­cretion away from state and local authorities. Funds for flood control cannot be used for sewage processing; funds for schoolbooks cannot be used for athletic equipment. State and local officials have complained of being locked into federal programs that don’t take local needs into consideration.

Presidents Nixon and Reagan thought they had the answer: Move away from the categorical grants to broader “block grants” and “revenue sharing.” Both pres­idents called their programs the “New Federalism,” connodng a return of some power and control to the states. The federal government had become too power­ful, they argued, so power should be given back to the states. It didn’t quite work that way.

Congress, under President Nixon’s leadership, designated $6,9 billion a year to go directly from the federal treasury to the states as revenue sharing, which states could spend as they needed without federal guidelines or supervision. The trouble was that this made states and cities more dependent on Washington, not less. Further, because revenue sharing is distributed by formula, it goes to rich cities and poor cities alike. One city may desperately need revenue to keep up po­lice and fire services, whereas another may use it just to improve its parks. Because revenue sharing gives money with virtually no strings attached, it erodes federal control. Revenue sharing isn’t “aimed” at problems; it leaves that up to state and local officials, who mostly use the money for general budget {police and fire de­partments, streets, and schools).
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An intermediate ground between categorical grants (too narrow) and rev­enue sharing (too wide) appeared in 1974 with ‘block grants. These take several re­lated categorical grants, roll them into one, and let state and local officials use them within the general category.12 President Reagan, for example, reduced dozens of categorical grants into a few block grants and called this the New Feder­alism. Congressional Republicans in the mid-1990s sought increased block grants as a way to shrink Washington’s powers. There is a catch. Whereas the block grants are simpler and have fewer federal strings attached, they also provide less money. In 1978, some 25 percent of state and local government outlays were federal aid. By 1988 federal funding of state and local outlays was down to about 17 percent and has declined since. This decline left many states and municipafities, which had taken on many new tasks, so desperate for funds they had to raise taxes. The question of how much federal money to give and how to give it is a permanent problem ofU.S.federalism, for it is one facet of the problem we discussed earlier, that of the proper balance between central and state governments in federal systems.

Idris El-Radi