Search the archive.

The previous section has sketched the cost to a unified response to the panoply of existential threats we face. This section restates the argument in a positive light: there are indeed benefits to a decentralized response.

The tradeoff between centralization and decentralization is an enduring political issue and is salient in the context of responses to existential threats. The case for centralization is clear: some nations, by failing to address climate change or regulate science, are imposing risks on other nations. These nations are said to create negative externalities that are borne, unfairly, by others.146 But this is simply a new presentation of a common problem. Whenever one jurisdiction engages in activities that create externalities that jeopardize the welfare of others, the situation arguably calls for centralization and the harmonization of regulation across jurisdictions.147

The inability of states to smooth expenditures over the business cycle has implications beyond sound fiscal housekeeping. Ultimately, the pathologies of state budgeting imperil the project of federalism itself. State budget crises prompt demands for federal bailouts, as evidenced in the most recent federal stimulus package. 11 Federal bailouts answer a short-term problem of how to maintain spending levels in a fiscal crunch, but they also risk undermining the goals of federalism. Most significantly, bailouts result in a softening of the budget constraint that states face. Each new bailout erodes the incentive for fiscal responsibility in the future, jeopardizing the supposed efficiency benefits of decentralization. Moreover, to the extent that federal bailouts come with strings attached (as is almost always the case), state fiscal autonomy is also compromised. 12 Over time, if states cannot responsibly manage their own finances, there will be increasing pressure to return the task of revenue raising to the federal government. Centralized funding in turn implies either federal control over policy or legal controversy over the rules for disbursing federal grants.

The decentralized nature of the social safety net for economically vulnerable families with children is one of the most important structural features of the US welfare state. Our research establishes that the extent of crossstate variation in the generosity and inclusiveness of safety net provision is extensive, thus constituting a crucial form of inequality— inequality in the treatment of similar needs and claims by people who happen to live in different states.

We argue that this form of inequality deserves more sustained attention, particularly with regard to policy design and reform. In designing social policies, there is a clear trade- off between uniformity through national provision, reflective of equality in social rights and equity considerations, and variability through state or local provision, indicating substantial inequality in rights and a lack of centralized effort aimed at equity in provision (Obinger, Castles, and Leibfried 2005). As Aaron Wildavsky (1985) famously noted, “federalism means inequality”— and our work confirms that.

Many have missed the deep implications of economic inequality for core tenants of fiscal federalism. This framework shows that debates about the proper assignment of redistribution assume a different character depending on the preexisting level of inequality within the political community. Specifically, economic inequality raises the stakes of "fiscal splintering" for redistributive outcomes and possibilities: where economic resources are unevenly distributed across geography, the spatial definition of fiscal units takes on great significance. And the presence of economic inequality places a ceiling on local governments' ability to provide public goods or achieve redistribution, absent centrally-coordinated fiscal transfers.

Traditional models of fiscal federalism overlook this important relationship. Orthodox models of decentralization argue that location-mobility of residents is a disciplining measure for local governments. The consensus view is that mobility limits the ability of local governments to achieve redistribution, because high-income people will exit when it is attempted. 97 Others point to evidence showing that locations decisions are relatively inelastic to support their conclusion that redistribution can happen at the local level.98 I show that this debate does not need to be settled in order to conclude that rising levels of economic inequality support moving redistribution to higher levels of governance.

Like the federal EITC, state EITCs have a long, successful history of using the income tax to improve the economic security of low-income working families. Some question whether a state without an income tax could offer similar assistance, since state revenue departments in these states do not typically collect the information about family income and structure needed to determine EITC eligibility. The example of Washington State’s Working Families Tax Rebate, however, illustrates how states without an income tax could work with the IRS to provide a state credit.

The Washington EITC has never taken effect because the state legislature hasn’t funded it,a but its design shows how it would work in the absence of a state income tax. To confirm eligibility, Washington State would use data on federal EITC claimants that the IRS provides to state revenue departments under a data-sharing arrangement. Piggybacking on these federal efforts saves administrative costs for the state. State officials estimate that when the credit was phased in fully, the administrative costs would constitute only about 4 percent of the cost of the EITC itself.b (Administrative costs in states that already have an income tax are substantially lower, typically well below 1 percent of the credit’s value.) If Washington were to increase the size of its credit, the administrative costs would be an even smaller share of the total cost.

State EITCs Are Easy to Administer, Offer Good Value to States

State EITCs are easy for states to administer and for working families to claim. States incur virtually no costs for determining eligibility for the credit because, in most cases, families eligible for the federal credit also are eligible for the state credit. Since state credits typically are set at a fixed percentage of the federal credit, state revenue departments need only add one line to a state’s income tax form, and filers need only multiply their federal EITC by a specified rate to determine their state credit.

Box 3: Expanding EITC for Workers Not Raising Children Would Improve Equity

Expanding the EITC for workers not raising children in their home would ensure that the credit offers a hand up to more workers struggling to get by on low wages.a The federal EITC for these workers is very limited and small, even though they are integral members of their communities and local economies. Many are non-custodial parents or future parents.

Twenty-nine states plus the District of Columbia and Puerto Rico have enacted their own version of the federal Earned Income Tax Credit (EITC) to help working families paid low wages meet basic needs.[1] State EITCs build on the success of the federal credit by keeping people on the job and reducing hardship for working families and children. This important state support also extends the federal EITC’s well-documented long-term positive effects on children, boosting the nation’s future economic prospects.

State EITCs provide extensive benefits to children, families, and communities, and are straightforward to administer and to claim. Lawmakers in states without their own EITC should consider enacting one. The small number of states that have cut back or eliminated their credits should reverse course, and states that have limited their credits so that they only offset income taxes should expand them to help offset the full range of state and local taxes that low-income households pay. In addition, states can extend the credit to certain workers who currently are ineligible, such as younger workers not claiming children and those filing taxes with an individual taxpayer identification number (ITIN). All of these steps would substantially enhance the credits’ impact. By investing in an EITC, states can make a real difference in the lives of working families with low and moderate incomes.

To help more families make ends meet during the pandemic and beyond, states without an EITC should adopt one and those with one should continue expanding them. States can enact new credits, those that have not yet made their credits fully available to all families (sometimes called making the credits “fully refundable”) like the federal credit should do so, and all states should expand beyond the parameters of the federal credit to provide equitable treatment for those who are currently excluded. That includes increasing the credit and eliminating age restrictions for working adults without children in the home, and ending the exclusion for individuals using Individual Tax Identification Numbers.

EITCs Boost Family Income, Communities, and Local Economies

Since replacing Aid to Families with Dependent Children (AFDC) in 1996, the Temporary Assistance for Needy Families (TANF) block grant has been the primary source of funding for states to provide basic cash assistance for families with children when they face a crisis or have very low incomes. But states only spend a little over one-fifth of their combined federal and state TANF dollars on basic assistance for families with children, our analysis of the latest data from fiscal year 2020 shows. 2 (See Table 1.) States continue to use their considerable flexibility under TANF to divert funds away from income support for families and toward other, often unrelated, state budget areas. By redirecting the funds back toward cash assistance, however, states could promote racial equity and child well-being.

Cash assistance to families struggling to make ends meet can improve children’s long-term outcomes while also providing parents with the cash they need to afford basic necessities such as rent, utilities, personal hygiene products, and school supplies. Over time, however, TANF has significantly declined in performing this core task. Fewer families in need have access to the program (in 2020, for every 100 families living in poverty, only 21 received TANF cash assistance, down from 68 families when TANF was created3 ); benefits leave those who do have access far below the poverty line; and as this report explains, states are spending a shrinking portion of their TANF funds on basic assistance.

With each state effectively on its own, it should come as little surprise that state RDFs have not been adequate to fund large revenue shortfalls. 203 Self-insurance against uncorrelated risk is simply not the best move. Consider the inefficiencies of requiring every individual to self-insure against untimely death or property loss. This would lead to either massive over-saving or frequent painful consumption shocks. The counter-factual is absurd, simply because the market case for insurance in these situations is so clear that the product has existed for centuries. Why not a similar approach for states?

In its simplest form, a multistate RDF would function essentially like pooled insurance. Each state would pay an annual premium to the multistate RDF - much as they already are to their own independent RDFs - and the multistate RDF would pay out when revenue dropped below a particular level. 204 The premiums would be based on a combination of overall group risk, with perhaps some experience-rated variation to account for differences among states. The premiums would also depend on the size of the particular state's budget. The payout itself would be some percentage of the shortfall from expected revenues. For example, if a state is expected to raise (or, alternatively, had spending commitments of) $ 1000 per capita but only raised $ 700 per capita, the RDF could make up the shortfall. Depending on the degree of co-insurance, the RDF might pay out 100% of the $ 300 shortfall, or something less than 100%.

Therefore, it may be appropriate, or at least predictable, for a state to perform some of the redistributive function of taxation, but costly for it to perform the insurance function. Given that states use, and likely always will use, redistributive programs such as a progressive income tax, we should ask whether there are ways to limit those insurance costs and thereby mitigate some of the painful revenue volatility faced by states, due in part to their use of income taxes.

Because the costs of limited state-level progressive income taxation are related to insurance, rather than redistribution, there is an obvious way to mitigate those costs, at least theoretically: reinsurance. If it is possible to reinsure the state-level risks of a progressive income tax at the national level, then it would be possible in theory to have our cake and eat (at least some of it) too. We could have some state-level redistribution while still having largely national-level income insurance.

A historically large share of the nation’s wealth is concentrated in the hands of a few. As a result, millions of American families have less wealth, and therefore fewer opportunities, than they otherwise would. Further, since wealthy people are overwhelmingly white, this extreme wealth concentration reinforces barriers that make it harder for people of color to make gains. State taxes on inherited wealth — estate and inheritance taxes — can be a powerful tool for building a more broadly shared prosperity.

Most state and local tax systems are upside down: the wealthy pay a smaller share of their income in these taxes than low- and middle-income people do, even though they are best able to afford it. State taxes on inherited wealth are an exception, since they apply only to the wealthiest individuals and are the primary state tax on wealth. But these taxes have gradually eroded even as wealth and income have become more concentrated. States with these taxes should maintain them, and states without them should consider enacting them — or consider taxing inheritances as income. State taxes on inherited wealth do not depend on the existence of the federal estate tax.

The federal tax law’s extraordinary windfall for corporations and very high-income households will further concentrate income and wealth at the top. States may wish to reject this approach and to offset some of the windfall for those at the top by raising taxes on these households and investing the resulting revenue in middle- and lower-income Americans. Examples of policies that states could implement include: •Recouping the ill-advised tax break for “pass-through” income. Only a small number of states are coupled to the new federal deduction for pass-through income and will need to decouple from it to avoid losing revenue. But all states could go further and impose a surcharge on pass-through income that will benefit from this unwarranted giveaway, the benefits from which are highly tilted to the wealthy and large companies. 13 Alternatively (or in addition), states could follow the example of California, Illinois, and Massachusetts and impose a low-rate tax directly on pass-through businesses. 14

Establishing a strong minimum corporate income tax. States could impose a corporate minimum tax based on a measure of in-state corporate activity that is less easily manipulated than corporate profits, such as a minimum tax tied to gross receipts or the “value added” by the firm — basically, the difference between the company’s purchases of inputs from independent firms and its sales of finished products. New Jersey and Kentucky had low-rate gross-receipts-based minimum taxes in the recent past, and New Hampshire still levies a “Business Enterprise Tax” based on the value added by the company.

Policymakers in several states are reviewing options to strengthen support for public investments crucial to state economies and residents’ well-being, such as quality early education, affordable college, and modern infrastructure. One way to raise the necessary funds is to raise personal income tax rates on the highest incomes, a policy choice sometimes referred to as a “millionaires’ tax.” This approach makes sense: evidence indicates it can generate substantial revenue for public investments that boost a state’s productivity in the long run, without harming economic growth in the short term.

High-income tax increases can generate substantial revenues for investments in people and communities that provide economic and social benefits over the long term. Raising personal income tax rates has allowed states to prevent or minimize harmful budget cuts or invest in ambitious new initiatives such as expanding early education, boosting access to college, improving infrastructure, and strengthening “rainy day” funds to prepare for the next recession. Evidence indicates that sustained support for public building blocks of growth can help states improve their residents’ well-being, expand opportunity and racial equity, and build more prosperous economies over time.

The efficacy of the US anti poverty policy is shaped both by its reliance on categorical sorting and by its decentralized structure. To examine the implications of these features, this study introduces a novel disaggregation of poverty reduction instruments into four mechanisms: federal taxes and federal transfers (centralized) and state taxes and state transfers (decentralized). Using the Current Population Survey’s Annual Social and Economic Supplement data and a sequence-independent decomposition, this analysis assesses the relative effectiveness of the mechanisms at the national level between 1996 and 2016 and across the states in 2016. The study finds that absolute and relative poverty reduction is greater and has increased over time for working-age households with children compared with those without children. We also find cross-state variation in market- and disposable-income poverty and in the poverty reduction attributable to each of the redistributive mechanisms, highlighting the importance of examining poverty and antipoverty policy subnationally.

Bae and Jung (2011), for example, find that the restrictiveness of state TELs has no impact on the overall level of either state expenditures or revenues. Amiel et al. (2014) find that states switch their revenue mix to more reliance on fees and miscellaneous revenues and the mix of expenditures is affected. Nicholson-Crotty and Theobald (2011) find that the presence and restrictiveness of TELs influence how states use federal transportation aids; states with no TEL spend 66 cents of state funds for every federal dollar, while those with the most restrictive TELS spend only 36 cents of state funds per federal dollar for transportation. Shi (2017) finds that TELs imposed on local governrements increased the number of special districts, specifically to side step the restrictions of the TEL.

Tax and expenditure limitations tend not to fulfill the intended outcomes of a smaller and more efficient government because they are, at best, a blunt instrument. For example, Deller, Maher, Stallmann, and Amiel (2013) find that states with more restrictive TELs tend to have higher levels of debt. While one could argue that states incur debt to circumvent revenue limits, they find that states with TELs with expenditure limits also have higher levels of debt. In a study of the impact of TELs on public infrastructure, Deller, Amiel, Stallmann, and Maher (2013) find that TELs that are more restrictive have a weak negative impact on the percentage of bridges deemed structurally deficient but are associated with an increasing number of bridges deemed functionally obsolete. Benson (1980) found that California's Proposition 13 increased the interest costs of general obligation bonds, a reflection of poorer bond ratings. Wagner (2004) reports that a revenue TEL lowers credit ratings and an expenditure TEL increases credit ratings of state governments. Stallmann, Deller, Amiel, and Maher (2012) report similar findings for states using indices of TEL restrictiveness by type of TEL. In complementary studies, Maher, Deller, Stallmann, and Park (2016) found more restrictive TELs on cities have a negative impact on their credit ratings and Maher, Park, and Harrold (2016) found that municipal TELs reduced other postemployment benefit (OPEB) funding ratios.

Spending Continues to Grow in Fiscal 2023 Budgets Following Largest Ever Increase in Fiscal 2022 Enacted budgets call for general fund spending totaling $1.16 trillion in fiscal 2023, a 6.7 percent increase over preliminary actual spending levels for fiscal 2022. This increase follows rapid spending growth in fiscal 2022, when general fund spending increased 18.3 percent – the highest growth rate ever recorded in the Fiscal Survey of States. Overall, 40 states are projecting general fund spending increases in fiscal 2023, while 10 states are forecasting declines. Fiscal 2023 budgets that states reported on in this survey were enacted as early as spring 2021 for some biennial states and as late as summer 2022. Upward revisions to revenue forecasts since budget enactment may increase spending levels for fiscal 2023.

Based on preliminary actual data (as well as estimates for some states), general fund spending totaled $1.08 trillion in fiscal 2022, an 18.3 percent increase over fiscal 2021 levels. This steep increase is driven by a number of factors, including the high rate of inflation; states spending down surplus funds from fiscal 2021 (and fiscal 2022) on one-time investments; a shift from a reliance on federal funds to general funds in certain areas; a lower baseline in fiscal 2021, when some states made budget cuts in anticipation of revenue shortfalls; and the inclusion of federal COVID-19 funds in expenditure amounts for a few states. Adjusted for inflation, general fund spending in fiscal 2022 grew 9.6 percent.1 (See Figure 1.)

Delegation is part and parcel of politics because elected officials who write statutes and make policy rarely personally implement these directives on the ground. The central challenge in the design of government institutions is thus to provide street-level bureaucrats with sufficient authority to utilize their expertise while avoiding having this discretion be abused to pursue divergent policy goals. This dilemma remains at the heart of the study of bureaucratic politics. However, the dilemma presupposes a trade- off between the discretion thought necessary for bureaucratic effectiveness and democratic responsive- ness (e.g., Epstein and O'Halloran 1999, 6). In reality, there are ample arenas in which discretion and respon- siveness go hand-in-hand - with street-level bureau- crats exercising their authority in highly responsive ways. Across many policy areas, including Medicaid (Weissert 1994), occupational health and safety (Scholz 1986; Scholz, Twombly, and Headrick 1991), labor law (Schmidt 2002), Social Security disability insurance (Keiser 1999), and immigration (Lewis et al. 2013), local workers appear to use their discretion to align realized policy outcomes with the local community norms and values, even when their formal responsibil- ity is to implement otherwise identical statutory lan- guage. Such behavior is a different sort of bureaucratic responsiveness, one that may conflict with the clear intent of the legislators and elected executives who crafted the relevant legislation. In these and many other settings, discretion potentially brings about too much responsiveness rather than too little of it from the point of view the laws' authors.

Delegation of administrative authority is commonly thought to involve a tradeoff between the discretion necessary for bureaucratic effectiveness and democratic responsiveness. In many con- texts, however, discretion and responsiveness go hand-in-hand: Street-level bureaucrats may adapt their behavior to accommodate local norms and values, even when implementing the identical statutory language. I argue that this type of bureaucratic adaptation can explain local variation in participation rates in the national food stamp program. By exploiting between-state differences in the level at which the program is administered, I further show that administrative centralization does not appear to moderate such responsiveness, which is high across institutional settings. Using data on application denial rates for a subset of these states, I offer additional evidence that some of the county-level variation in program participation is a product of decisions made by local caseworkers. Together, these findings offer important insights on the institutional preconditions for bureaucratic responsiveness and control.