Public Finance in the American Federal System: Basic Patterns and Current Issues

2 Colum. J. Eur. L. 533 (1996)

Richard Briffault. Professor of Law, Columbia University School of Law.

Public finance issues with significant consequences for American federalism have been at the top of the political agenda for the last several years. Indeed, much of the current debate about American federalism has been explicitly about questions of public finance: Which level of government should pay for which programs? What is to be the relationship between financial responsibility and policy-making authority? Should there be some overall limitation on government outlays and receipts?

Thus, one of the first actions of the 104th Congress was passage of a measure, swiftly signed into law by the President, to curb the ability of the federal government to force states and localities to undertake costly programs without providing federal funds that would cover those programs’ costs., Congress also quickly took up a central element of the Republican Contract With America – the balanced budget amendment, which passed the House of Representatives but fell just short of the constitutionally required two-thirds majority in the Senate. In addition, Congress and the President spent months struggling over proposals to change basic components of the social safety net, such as Aid to Families with Dependent Children (AFDC) and Medicaid, in order to reduce the federal government’s role and devolve greater responsibility to the states. Each of these initiatives – as well as other measures such as the line-item veto, recently enacted into law, and the flat tax proposals that dominated the early phases of the 1996 Presidential campaign – has important implications for the size and composition of the national budget, nation-state relations, and the ongoing development of American fiscal federalism.

In this paper, I will consider the basic elements of American fiscal federalism and these current issues. The federal constitution gives relatively little direct attention to the structure of public finance. The Constitution gives the federal government broad authority to raise and spend money, and imposes some constraints on the states, but most of the critical questions concerning the scope and content of federal and state budgets and the relationship between the two levels of government are left to political, not constitutional, determination. In the absence of formal constitutional resolution of these questions, we have developed an informal fiscal constitution. To a considerable extent, the federal government, the states, and local governments rely on different sources of revenue and undertake different spending responsibilities. The widespread use of intergovernmental grants sometimes blurs the distinctions among the levels of government, but the differences do exist and they are relatively persistent. This informal constitution also involves a considerable amount of federal-state interaction. Federal regulatory, taxing and spending decisions have direct implications for state and local finances. Conversely, state fiscal practices have begun to shape federal fiscal decisions and, indeed, have emerged as a model for a federal fiscal reform agenda.

After examining the basic components of the informal fiscal constitution, I will turn to three current issues: mandates relief, block grants, and the balanced budget amendment. Unfunded mandates and block grants deal with federal-state interactions. The balanced budget amendment addresses only the federal government – although a long-term consequence may be a reduction in federal assistance to states and localities. Moreover, as with any measure that affects federal-state relations, each of these issues has significant implications for interstate relations and for the substance of public policy.