Urban Policy in a Changing Federal System Proceedings of a Symposium (1985) / Chapter Skim
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3. Fiscal Federalism After the California Taxpayers' Revolt: A Sorting Out of Sorts
3. Fiscal Federalism After the California Taxpayers' Revolt: A Sorting Out of Sorts
Pages 71-90
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From page 71... ...
Revolt of the Taxpayers (1978-1980) The taxpayers' revolt not only imposed many tax and expenditure limitations, it also sent a powerful message to state and local policymakers, most of whom escaped highly restrictive fiscal limitations.
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From page 73... ...
_ ~ , _ _ , This squeeze on federal aid was greatly intensified in 1981 when Congress approved the Reagan administration's plan to raise defense outlays sharply while simultaneously granting major tax cuts. Fearful that the resultant increase in the deficit would once again release strong inflationary forces, Congress had no alternative but to trim lowpriority budget items in general and federal aid programs in particular (see Figure 3-2)
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From page 74... ...
2Federal aid as a percentage of federal expenditures from own funds. SOURCE: USACIR staff compilation based on survey of Current Business.
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From page 75... ...
Many officials keenly remember the Economic Stimulus Program of la77-1978, when the federal government authorized $16 billion in antirecession grants to states and local governments. This time, however, no federal aid was authorized and state and local policymakers were confronted only with far more painful alternatives -- program cutbacks or sharp tax hikes, or both.
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From page 76... ...
Conservative political leaders strongly object to major tax increases during a recession on the grounds that it is bad economic policy. By the same token, liberal political leaders oppose major cuts in domestic programs as being both inhumane and withdrawing a necessary stimulus to economic recovery.
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From page 77... ...
1Federal aid includes Aid to Families with Dependent Children and Medicaid payments. SOURCE : USACIR, staff computations.
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From page 78... ...
State-Local Spending Trends To a casual observer, the many state tax increases adopted in the 1981-1983 period might suggest that the tax revolt is over. However, a closer look at the evidence suggests a different interpretation.
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From page 79... ...
Further evidence that the tax revolt is not dead is to be found in the fact that eight states will be considering changes in their existing tax and expenditure lids this year and five states will be considering new limits. (Table 3-1 presents a summary of recent proposals to limit state tax increases and expenditures.)
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From page 84... ...
For example, we recently witnessed the astounding spectacle in Indiana where all the top state officials publicly pledged to repeal the worldwide unitary method of tax accounting in return for a promise from a Japanese firm to build a $15 million plant in Terre Haute. Federal Spending Prospects Any discussion of where we may be headed on the federal spending front must first concentrate on federal domestic programs.
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From page 85... ...
Social Security Booster With virtually no political risk, Congress repeatedly raised social security tax rates during the 1960s and 1970s to finance broadened program coverage. These repeated social security tax hikes met with little public opposition because most of the public viewed them as higher insurance premiums needed to pay for better protection.
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From page 86... ...
Deficit Finance Booster Public acceptance of deficit financing provided federal officials with their fourth expenditure booster: They could cover revenue shortfalls by borrowing, thereby avoiding the political pain associated with tax hikes or expenditure cutbacks. In 23 of the last 24 years, the national government spent more than it collected, and for those 23 years the deficits totaled about $1.0 trillion.
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From page 87... ...
FIGURE 3-4 Federal budget deficit as a percent of total federal expenditures.
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From page 88... ...
Nor has it evolved along the tax turnback and program swap lines advocated by the Reagan administration. Rather, New Federalism, which actually started in the latter half of the Carter administration, is a slow federal retreat along the entire federal aid front -- action dictated both by growing fiscal stringency and conservative political ideology.
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From page 89... ...
De facto New Federalism operates in a political climate that resolves the doubts in favor of economic development, defense expansion, and domestic public sector containment. Phase II of de facto New Federalism will most likely emerge in the wake of the November 1984 election as growing public concern about massive budget deficits will force federal policymakers to make far more painful choices than they have had to make thus far.
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From page 90... ...
9o REFERENCES Benker, K., and Kenyon, D 1984 Fiscal discipline: lessons from the state experience.
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