Why states shun 'new federalism'
President Reagan's ''new federalism'' has encountered considerable hostility among a host of state and local officials -- and for good reason. Those officials know a bad deal when they see one.
Contrary to all of the talk about state and local tax increases to compensate for federal aid losses, state and local taxes can be expected to fall as a consequence of the Reagan program. State and local officials can sense that their fiefdoms will, as a direct result of ''new federalism,'' contract by some multiple of the reduction in federal aid. Let me explain why.
In several key respects, ''fiscal federalism'' was deliberately designed, with the support of state and local officials, to pull up state and local taxes from their own sources:
* First, in a survey of 442 of the more than 500 federal grant programs, the Advisory Commission on Intergovernmental Relations found that 64 percent of the formula-based categorical grants included matching provisions; 61 percent of the project grants required a nonfederal match. And the nonfederal match can vary anywhere from virtually nothing to a hefty share of the funding responsibilites.
* Second, many states and communities were ''hooked'' on a number of aid programs, like federal law enforcement assistance, with very small initial matching requirements -- deals that elected officials found difficult to resist. However, the matching requirements escalated over ensuing years, saddling later state and local officials with greater shares of the funding requirements for programs that, by then, had their own local constituencies.
* Third, according to a study of 10 typical communities by Catherine Lovell, University of California-Riverside, the 10 communities had to endure nearly 1, 300 federal mandates and direct orders as conditions of securing federal monies, and nearly two-thirds of the federal mandates required the local governments either to initiate or extend their services, all of which have tended to impose greater tax burdens on the communities.
* Fourth, fiscal federalism had made states and communities dependent on their federal nursemaid, and with such dependency has come federal leverage to force subordinate governments to do the bidding of the federal treasury -- at, of course, less cost to the federal treasury. And that economic leverage has been exploited to coerce states to tighten their enforcement of a variety of consumer protection, environmental, highway, and equal-opportunity regulations. The net effect: greater taxes at the state and local levels.
* Fifth, a primary goal of fiscal federalism has always been to offset the ''fiscal inequities'' at the state and local levels -- to aid states that are hard-pressed for funds either because of limited tax bases (as identified by per capita income levels) or because of unusually high ''tax efforts'' (as identified by an unusually high percentage of state and community personal income going for state and local taxes).
By focusing on such measures of fiscal disparities, states and local governments have been induced to raise their state and local taxes. After all, a dollar increase in state and local taxes would mean the subordinate government could spend more than a dollar -- a bargain from the perspective of the individual state or local government doing the spending, a disaster when viewed from the perspective of all state and local governments having to compete for federal funds by raising their own taxes.
All of these considerations lead inextricably to the conclusion that federal aid has been propping up state and local taxes, often with the support of local and state government officials. State and local governments collectively have the same tax base as the federal government, but they cannot exploit that collective base as effectively as the federal government. States, for example, understand that a tax increase, made independent of tax increases in other states, will lead to an erosion of their tax base. The attraction of such federal aid has been that this system overrides competition among states by inducing all states to raise their taxes. The inevitable result is that when, or if, the federal aid props are withdrawn, state and local taxes will fall, maybe not immediately, but in the future when the forces of intergovernmental competition reemerge. According to my preliminary estimates, state and local expenditures will decrease by $20 to $30 billion for every $10 billion reduction in federal aid.
Although not recognized as such, the ''new federalism'' is a covert means of curbing growth in state and local taxes. For those who feel oppressed by state and local taxes, the Reagan program will be a welcomed relief.