Costs of the "New Federalism"

...Through the years, ad hoc measures have evolved to deal with the strains that urbanization has generated for the political institutions created by an agrarian Constitutional Convention...

...During the Nixon and Ford administrations, "Fiscal Federalism" became more general and less categorical...

...In addition, spending for key "urban" programs, such as community development, employment, and mass transit fell by 72 percent between 1979 and 1989...

...But the result has been fewer dollars without fewer mandates on cities to serve their citizens in need...

...The cumulative loss of federal aid to New York City over the decade has been $15.4 billion...

...There is, of course, a role for local taxes to provide purely local services...

...If the federal government were today providing the level of aid to New York City that it provided when Ronald Reagan took office, New York City would have about $2.5 billion more revenue in this fiscal year...

...From Revenue Sharing to Deficit Sharing mong the economic changes wrought by the 1980s has been a new fiscal relationship between the federal government, on one hand, and the state and local governments, on the other...

...Conference of Mayors, federal aid to state and local governments fell by $34 billion in real terms during the decade of the 1980s...

...It would, however, eliminate much uniformity...

...Of course, that was not the only change...

...Both the tax's progressivity and the responsiveness of its revenues to economic growth demonstrated, through time, that the federal government had a powerful tool not only to repair some of the inequality of the private economy but also to redistribute revenues within the public sector, from the highest level of government to the lowest...

...For example, the growth of huge urban areas, which everywhere cross county lines and, in the northeast, cross state lines, mocks rational political and economic decision making...

...Ronald Reagan's "New Federalism" killed "Fiscal Federalism...

...The only significant tax within the full authority of local government is the property tax, and even that is levied under state constitutional limitations and statutory controls, and is often subject to taxpayer referenda...

...Constitution created a federal system of government where responsibilities not expressly designated to the central government were the states...

...CETA died in 1981, although the death blow was dealt in the Carter administration...

...Ronald Reagan heralded the "New Federalism," which was supposed to consolidate federal grants and free the other levels of government from federal constraints...

...This money came with restrictions and tight controls...

...That is enough money to fund the entire police, housing, health, aging, and youth services departments combined...

...Because Reagan's "New Federalism" came at the same time as a massive cut in personal and business income taxes and a curtailing of their progressivity, the "revenues" in "revenue sharing" were no longer there...

...As the federal government searches to reduce its deficit, all levels of government recognize this truth: while we have many a multilayered government, there is, ultimately, only one layer of taxpayers...

...While the political consensus may be to have services provided at the local level, the economic consensus is that the resources are raised most efficiently at the national level...

...Following the federal income tax changes of 1986, which broadened the definition of income and thus the tax base, states and cities with progressive income taxes adjusted their tax rates rather than reap a "windfall" increase in revenues that would have flowed through from the federal changes...

...By the early 1970s this arrangement of responsibility had become known as "Fiscal Federalism...

...The substitution of the "New Federalism" for "Fiscal Federalism" moved state and local governments from revenue sharing to deficit sharing...

...New York City and New York State have worked to replace much, although not all, of that money...

...Mandates are the list of federal requirements, qualifications, prohibitions, specifications, constraints, and controls on specific types of state and local spending...

...It appears now that the "windfall" was grossly overestimated (or never happened) and that state and local tax revenues have suffered as a result...

...If the federal government isn't paying the piper, why is it still calling the tune...

...While these governments were erroneously paring back their income taxes, their ability to raise sales taxes was seriously restricted by the elimination of federal deductibility and their borrowing costs were raised through federal restrictions on the use of tax-exempt bonds...

...But, with a highly mobile population, "purely local" is a shrinking concept...

...One was the introduction of a federal income 276 • DISSENT The New Federation tax that provides a basic mechanism to redistribute income from rich to poor...

...Major programs were General Revenue Sharing (which had a special shortterm antirecession component during the midseventies) and the Comprehensive Employment and Training Act (CETA...

...Their elimination would not directly hit the federal budget...

...Most of this money was used to maintain city services or, ultimately, to substitute for local revenues...

...But with the current recession, that option has ended...

...Many of them are still attached by states...

...Beyond fire, sanitation, and parks, it is not easy to find services that ultimately do not have "spillover" effects onto nonresidents...

...The hallmark of the "New Federalism" was the shift of enforcement responsibility to the states and the elimination of the money altogether...

...State and local governments, aware of the federal deficit and the state of the economy, have launched their counterattack...

...Nor is the fact that fully one-third of Americans live in cities...

...From the point of view of hard-pressed cities and states, the logic of the argument is inescapable...

...That role is not reflected in either the distribution of political power or the distribution of resources and responsibilities of the public economy...

...According to the U.S...

...During those ten years, the wealth of the top 1 percent of Americans nearly doubled while the poorest lost nearly 15 percent of their income...

...Originally many of these mandates were attached to federal aid...

...The recent federal deficitreduction package capped domestic spending for the next five years, set limits on the deductibility of all state and local taxes from federal taxes, encroached on traditional state and local revenue sources by raising tobacco and alcohol taxes, raised gasoline taxes while diverting some of those receipts from highways, and mandated Social Security payroll taxes for state and local government workers...

...What has this meant for America's other governments...

...To bring home the specific effects of the "New Federalism," let me use America's largest city, New York, as an example...

...Federal aid has been a significant source of revenue for New York over the past two decades...

...The U.S...

...Originally, local governments were to provide basic services—police, fire, education, streets, and water—to their resident population...

...Neither was their role to compensate for the deficiencies in health care, schooling, and training throughout the world or in rural America, the birthplaces of a growing number of their new residents...

...Ten years later, at the time of David Dinkins's inauguration as the city's first AfricanAmerican mayor, only one dollar out of ten that New York City raised came from the federal government...

...Nor is the situation improving during the Bush administration...

...Accepting constitutionally designated political boundaries, economists set about rechanneling revenues down to where the service problems are...

...Yet, that is the role toward which America's cities have evolved, one that they continue to play in the national economy as we approach the next century...

...Within the confines of the Tenth Amendment and the interstate commerce clause, the federal government has, in this century, instituted a number of innovations that sought to better balance the fiscal flows with the actual economic and political responsibilities...

...The opportunity cost of the "New Federalism" in New York City, then, is the rising infant mortality rate, overflowing hospital emergency rooms, seven-month waiting lists for drug treatment, and doubling up of families throughout the public housing system...

...It was SPRING • 1991 • 277 The New Federation used during the city's fiscal crisis of the mid-to late 1970s to fund basic city services, including police and fire protection...

...As greater flows of goods, services, people, and money have tied this national economy together, the fiscal arrangements among these levels of government have become both more complicated and less sensible...

...The fact that presidential candidates debate education and anticrime policies, which are not federally provided services, demonstrates that most Americans feel at risk if any locality is not properly educating its children and incarcerating criminals...

...The principal mechanism for county or city-suburban cooperation is through state government—an entity uninterested, at worst, and slow, at best...

...The federal government's budget priorities shifted from spending seven dollars on the military for every dollar spent on housing to now spending forty-six dollars on the military for every dollar spent on housing...

...The cities' and counties' power to tax is dependent upon the states' authority...

...They are demanding "mandate relief...

...The states devolved, through home rule arrangements, responsibilities to local governments—counties, cities, school districts, and so on...

...The city's booming financial and real estate economy and considerable borrowing made the replacement of federal revenues possible...

...Their focus was not the redistribution of income or wealth...

...At the same time, federal taxes became less progressive...

...These ranged across criminal justice, legal services, housing, community health, and education...

...In the late 1960s, new federal spending created a range of specific local programs through specific grants...

...General Revenue Sharing expired in 1987, after a long strangulation...

...Economic theory supports the practical view that, with the broadest and most responsive tax base and an enforcement span from coast to coast, the national government is in the best position to tax for the provision of public services...

...By the time of Reagan's inauguration, when the federal commitment to state and local governments had already peaked, one out of every five dollars New York City raised came from the federal government...

...In 1989 the ten largest cities welcomed more than half of America's immigrants...

...q 278 • DISSENT...

...Cities play a pivotal role in the nation's private economy, where they provide work for millions (a large number of whom live elsewhere), are home to major employers, and are ports of entry for foreign goods and capital and ports of exit for American services and tourists...

...The city has provided roughly 67 cents and the state 33 cents of every dollar of federal aid replaced...