What the United States Can Teach the U.K. About Federalism

Bruce Katz
Bruce Katz Founding Director of the Nowak Metro Finance Lab - Drexel University

October 14, 2014

Devolution is in the air in the UK. In a remarkable turn of events, Britain’s political parties are competing over how, not whether, to devolve power to cities and metropolitan areas. Next week, the RSA City Growth Commission will issue its final report, laying out an ambitious plan to devolve power from Whitehall to Britain’s metro areas. In advance of the release, BBC4 has aired a program devoted to the growing calls to devolve power to the UK’s cities. This presents an opportune time to discuss what long-standing fiscal devolution in the United States might teach Britain.

The influence of the federal government in our federal republic is often exaggerated. Frequently overlooked is the power of cities, which are dynamic political entities in the United States thanks largely to their devolved fiscal powers. Boston, for example, used its fiscal authority to raise some $2 billion in FY2014. About two-thirds of this total comes from property taxes, but the rest comes from a wide variety of sources such as licensing fees, excise taxes, and fines. These local revenues made 84 percent of the city’s $2.6 billion budget this year.

Collecting revenue is only the start—cities often steer portions of their revenue streams toward specific projects. They use market mechanisms like tax increment financing (TIFs) and bonding of specific sources of revenue to generate capital for infrastructure and development. These financing methods help bring about market activity and leverage private sector involvement.

Many cities in the United States put particular initiatives up for a citywide vote, and if the measure passes, local governments are able raise the revenues and allocate the funding necessary to bring that project to fruition. In 2004, voters in Denver approved FasTracks, a proposal for a 0.4 percent sales tax increase to fund a wide-ranging transportation plan that includes the construction of new light rail. In 2008, voters in Los Angeles approved Measure R, a proposal for a half-cent sales tax increase to pay for transportation projects across the city. In 2012, voters in San Antonio approved a 0.125 percent sales tax increase to create city-wide Pre-Kindergarten programs.

Devolving fiscal powers to cities makes sense for several reasons. It gives communities with distinct economies the flexibility to invest in the particular areas that are most pressing for them—transit in one community, customized skills training in another, etc.—rather than follow the often prescriptive, “one size fits all” dictates of central government.

Devolved fiscal power also enables city governments to leverage private and civic sector capital. Co-investment from these other sectors is crucial for any type of development effort, but it is particularly necessary for large game-changing projects like attracting anchor institutions and improving transit corridors. In this respect, it’s important to think of cities not as simply public entities, but as a network of institutions and leaders across several sectors that must collaborate to get things done.

Fiscal devolution also allows cities to respond faster and more seamlessly to pressing social inequities. Both Boston and Manchester, for instance, have prosperous central business districts and are experiencing significant residential growth downtown, causing real estate prices to rise. This has priced out many longtime residents. Local leaders are best suited to confront this issue in both cities, but the fiscal circuitry looks very different in the two countries.

In 2013, then-Boston Mayor Thomas Menino announced a plan to construct 10,000 middle class and affordable housing units by 2020. The project would direct significant portions of city revenues toward developing the properties, and would be bolstered by the city selling publicly owned real estate, creating new zoning incentives to promote housing production in affordable neighborhoods, and offering homebuyer assistance services.

This would not be possible in Manchester. Manchester, like every other city in the UK, sends its revenues directly to Whitehall, which then spreads these funds to all cities across Britain. This is problematic for two reasons. First, it eliminates the possibility of a timely local response to market pressures. British cities are forced to wait for Whitehall to recognize problems and respond with corrective measures. Second, it creates perverse incentives. Cities that have taken innovative steps are not rewarded for their good behavior, and cities that have lagged behind can still count on a revenue stream totally divorced from performance.

The United States offers many lessons, but it is not perfect. Some areas of policy naturally lie at the federal or state level (like inter-metropolitan transportation), so when those levels of government don’t act, nothing gets done. Municipal fragmentation within metro areas means that cities often find themselves in competition with each other for economic anchors. And poverty tends to concentrate in certain jurisdictions, so many central cities and suburbs are in permanent states of fiscal stress. As the UK moves forward, it will be critical to maintain strong national investment in key activities as well as “devolve smart”—positioning the fiscal responsibilities at the metropolitan (rather than just the city) scale to avoid internecine warfare as well as growing fiscal disparities between jurisdictions.

For decades cities have looked to Whitehall for resources and permission. It is now time for Whitehall to look to cities for innovation and progress. The result will be not only more successful cities, but a more prosperous and inclusive nation.

This opinion was originally published by the City Growth Commission.