Geographic disparities means states can’t redistribute. Some states are just too poor, federal action is key

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.

Just as scholars have argued that the competitive forces of residential mobility have the effect of making local redistribution impossible, these examples suggest that-on a static basis-high levels of inequality will tend to have the same effect. So as long as there are some constraints on mobility, then it can be said-without qualification-that rising inequality will always and necessarily have the effect of increasing the geographic clustering of resources. This follows mathematically from the fact that inequality is defined as an increasing concentration of economic resources across a population, and that people are indivisible economic units-they exist at only one place in time. And to the extent that economic resources are unevenly spread across a political community, then the exercise of line drawing-of determining the size and placement of the fiscal units-becomes increasingly important as a determinant of the practical availability of inter-unit economic redistribution.

For public finance scholars, the predominant policy response to the trend of economic stratification has been to increase the burden of taxation on very high-wealth individuals. 99 But as the model supporting this framework demonstrates, the case for centralizing redistribution depends in large part on the level of economic inequality in a polity-and is thus greatly strengthened by rising inequality. The significant implications of this basic relationship have not been fully explored. Service devolution to lower, smaller geographic units has been praised for various virtues according to America's favorite versions of democratic theory.100 But under a set of straightforward assumptions, these structures will also have the inevitable effect of deepening inequality and making the efficient provision of public services less likely. As a policy matter, it suggests that we should focus on either increasing the size of fiscal units of redistribution to include ultra-wealthy or alternatively shifting the site of redistribution to the circle that is large enough to include both the haves and the havenots.

I argue here that on policy matters involving some element of redistribution-that is, almost everything the government does-fiscal decentralization, under the background condition of economic segregation, will always result in increased inequality, compared to centralized redistribution. The existence of rising income inequality thus provides support for shifting the site of revenue collection to higher levels of government as a general policy, even as decision-making may be retained at local levels. This conclusion represents the opposite direction of recent policy debates, which have proposed sharply curbing or even eliminating federal support to states and local governments.

The federal government can easily capture the tremendous wealth that our economy produces, no matter how it is distributed over geographic space within the country. From this basic insight, we can both better understand the shortcomings of the current system and also make specific recommendations for reform. Instead of devolving the financing of public investments-whether schools or courts or infrastructure-to ill-equipped cities and states, the federal government should respond to rising economic inequality by assuming responsibility for their funding.