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Constitutional Right to a New Fiscal Federalism

Constitution Day reminds us that decentralization is a hallmark of American government. The Tenth Amendment to the U.S. Constitution explicitly reserves to the states or the people any powers not delegated to the federal government.

At no time, however, has the federal-state-local partnership been more critical, and perhaps more strained, than during the Great Recession. The American Recovery and Reinvestment Act will funnel more than $280 billion through state capitals, counties, cities, and towns in an effort to jump start the economy. Yet, only a modest portion of this aid will be available to meet states and localities own formidable budget challenges in the wake of states’ worst revenue decline on record.

Even with recent extensions, most stimulus payments are scheduled to expire next year. State revenues, however, will remain weak for several years as job growth and income tax collections tend to lag economic recovery. Local revenues will also dip as state cutbacks take effect and property taxes catch up with diminished market values.

In the longer term, the prognosis may be even worse. Some economists have suggested that the United States is entering a “new normal” of dampened growth, consumption and employment. One casualty of this shift may be permanently depressed state and local income and sales taxes. At the same time, these governments will confront rising costs, particularly in health care and retiree obligations, currently estimated at more than $1 trillion.

Faced with the same cost pressures, the federal government may seem an unlikely source of aid. There is also an inherent tension between propping up state and local governments to prevent harm to vulnerable populations while also maintaining appropriate incentives for state and local adjustments to new fiscal realities.

Yet, the stimulus act may contain the seeds of a new fiscal federalism. Compared to some previous anti-recessionary efforts, it targeted funds to local economic conditions and required extensive, some say intrusive, reporting. These innovations may hold lessons for the design of an ongoing countercyclical assistance program, a “Federalism 2.0.”

In any event, critics have long charged that federalism is broken. Constitution Day provides an opportunity to dedicate ourselves to trying to fix it.