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The American Fiscal ConstitutionAuthor(s): Kenneth W. DamSource: The University of Chicago Law Review, Vol. 44, No. 2 (Winter, 1977), pp. 271-320Published by: The University of Chicago Law Review

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*~~I *~I VOLUME44 NUMBER 2 WINTER1977

The AmericanFiscal Constitution*Kenneth W. Damt

The United States Constitution contains relatively fewprovisionsexplicitly concernedwith the authority of thefederalgovernmentand the states to tax and spend. Nevertheless, an

impressivestructureof rules has evolvedgoverningthe division

of fiscal powersand responsibilitieswithin ourfederal system.

These rules include Supreme Courtdecisions interpretingtheConstitution, key frameworklegislation, and implicit under-

standings derivedfrom existing practice. ProfessorDam con-structs a general outline of the resultingAmerican Fiscal Con-

stitution, and providesa contrastingviewof the West German

fiscal constitution. He also offers some tentative conclusionsabout how federal grants-in-aid and revenue sharinghave af-fected the distributionoffiscal benefitsand burdenswithinour

system.

The notion of an AmericanFiscal Constitutionmay strikemostAmerican constitutional lawyersas odd. The Constitutionhas littleto say about taxation and expenditures, and what it does say isneither detailed nor comprehensive.The Framerswere content to

* An earlierversionof this paperwas delivered n July, 1976,at a conference n Bonn,West Germany,sponsoredby the DeutscheForschungsgemeinschaftn the occasion of the

United States Bicentenary.A numberof the author'scolleaguesread variousversionsof the

manuscript,and he wouldlike especiallyto thank GerhardCasper,WalterHellerstein,Ed-

mundKitch, WilliamM. Landes,and Phil C. Neal for their commentsandsuggestions.Hewouldalso like to thankRobertSherwin,a secondyearstudent at the Universityof ChicagoLaw School,forassistingwith the statisticalwork n Part m.

t HaroldJ. and MarionF. GreenProfessor f InternationalLegalStudies,The Univer-

sity of Chicago.

271

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deal with a few key issues ratherthan specifythe respectivefiscal

powers and responsibilities of the federal government and the

states. In the License Tax Case' of 1866 Chief Justice Chase wasable to summarize the constitutional rules on the federal taxingpowerratheradequatelyin a few sentences:

[TJhepowerof Congress o tax is a veryextensivepower.It is

givenin the Constitution,withonlyoneexceptionandonlytwo

qualifications.Congresscannot tax exports, and it must im-

pose direct taxes by the rule of apportionment,and indirecttaxes by the rule of uniformity.Thus limited, and thus only,

it reacheseverysubject, and may be exercised at discretion.2The constitutionalprovisionson federal expendituresand on

state taxing and spendingare even sparser.Yet when one contem-

platesthe Constitutionas a whole,consideringprovisionsnot specif-ically directedto fiscal mattersand takinginto accountthe federalstructurecreatedby the Constitution,an imposingedificeof powersand limitations can be perceived.The result is whatI shall call theFiscal Constitution.By that I mean the sum of the constitutional

provisions bearing on taxation and expenditure, including bothrules definingthe fiscal competenceof the branchesof the federal

governmentand rules allocating taxing and spending powersbe-tween the federalgovernmentand the states.

Supplementingthe rules of taxation and expenditurefoundinthe Constitutionare severalstatutes that are so far-reachingn their

implicationsforyear-by-year iscaldecisionsthat they deserveto bethought of as quasi-constitutional. The most important are the

Budget and AccountingAct of 19213 nd the CongressionalBudgetand ImpoundmentControlAct of 1974.4Another statute that maybecome as historically mportant s the State and Local Fiscal Assis-tance Act of 1972,5which inaugurated he generalrevenuesharingprogram.Americanconstitutional aw does not havea separatecat-egoryto describe these "framework"tatutes, thoughthey are in-creasing in importance.6Althoughsuch statutes can be amended

' 72 U.S. (5 Wall.)462(1866).2

Id. at 471.3 Budgetand AccountingAct of 1921,ch. 18,42 Stat. 20 (codified n scattered ectionsof 31 U.S.C.).

4 Congressional udgetandImpoundmentControlAct of 1974,Pub. L. No. 93-344,88Stat. 298(codified n scatteredsectionsof 1, 2, 31 U.S.C.).

5 Stateand LocalFiscalAssistanceAct of1972,Pub.L.No.92-512,86 Stat. 919(codifiedin scatteredsections of 26, 31 U.S.C.).

' Consideralso the WarPowersResolutionof 1973,50 U.S.C. ?? 1541-1548Supp. V1975).See Casper,ConstitutionalConstraints n the ConductofForeign ndDefensePolicy:A NonjudicialModel,43 U. Cm.L. REV. 63,481-82(1976).

272 [44:271



American Fiscal Constitution

under the same congressionalmajorityruleas any otherstatute andmust comply with the Constitution, it would be a triumphof form

over substance to treat them as ordinarylegislation.When we turn from the formal Fiscal Constitution to fiscal

practice, we find that the actual pattern of federal and state taxesand expendituresat any one time reflects some ratherclear princi-ples. The federationand the states specialize, each selecting certaintaxes and certain subjects of expenditure. There are, to be sure,overlaps on both the taxing and spending sides, and the degree of

specialization and the scope of the overlapschange over time. But

these changes are slow, well-known, and seldom reversed. As welook back over time, the changes seem motivated much less bypartisan political differencesthan by the graduallychangingrole of

government n society. In short, fiscal realitiesreveal a clearer nter-

governmental fiscal structure than does the Constitution itself.

Moreover,although the federal Constitution is not concernedwiththe devolution of state power to local governments,an analogouspattern of specialization in taxing and spending is to be found be-tween state and local governments,againwith gradualchangesover

time.This stable yet evolvingstructure reflectsa widespreadconsen-

sus in American society about the respective roles of the federal,state, and local governments. When there is political controversyover federal and state responsibilities it tends to be limited to oneor two items on the public agenda, such as the debate today overthe financing of welfare. Usually, when a new issue arises with re-

spect to the scope of governmentalactivity the locus of responsibil-

ity between state and nation is not in doubt. Even the recent finan-cial crisis of New York City, which some observersperceived as acrisisof fiscal federalism,broughtforthonly a minorfinancinginno-vation in the form of a three-year"seasonal"loan fromthe federal

governmentto the municipality,with full repaymentrequiredat theend of each fiscal year.7 Although the independenceof New York

City within the New York state system of government has been

reduced, no change in the allocation of either taxing or spendingresponsibilities between federal and state governmenthas as yet

emerged.With the thought that this evolving structure is at least as

7 New YorkCitySeasonalFinancingAct of 1975,31 U.S.C. ?? 1501-1510Supp.V 1975).Federal oansto states andlocalgovernments recommon,and some are made on a revolvingbasis. See OFFICEOF MANAGEMENT BUDGET,SPECIALANALYSES,BUDGETOFTHEUNITEDSTATES

GOVERNMENT, ISCALYEAR 1978, at 288-89(Table0-10) (1977)[hereinafter ited as SPECIAL

ANALYSES1978].

1977] 273



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importantas the provisionsof the Constitution,andperhapscanbedescribedas the constitution(witha lower-case"c")underlying he

processofpublicchoice,I shall describe his structure n somedetailin PartIII.But beforedoingso, I shall set forth in PartI anoverviewof the provisions of the formal Constitution and the SupremeCourt's interpretations of them. Throughoutthe article, and insomewhatgreaterdetail in Part II, I shall contrast the AmericanFiscal Constitution with that of anothereconomicallyadvancedconstitutional federation-the FederalRepublicof Germany.

I. THE CONSTITUTIONALROVISIONS

The Constitutionwasdrafted n an era whenthe fiscalresponsi-bilities of governmentswerevery differentfromtoday. In 1787thefiscal problemwas not so much to raise and spend large sums of

moneyefficientlyas to secure a modestsourceof revenueto financelimited governmentaloperations.It was also a Constitutionfor anew nation, to be formedout of states that alreadyhad their owntax systems and their own protectionist tariffs. Thus, one of the

principal fiscal objectives of the Constitution was to ensure that

state tax and tariff policies did not impede the creationof a freetrade area amongthe states or permit some states to profitat the

expenseof others.In light of today's vastly changedfiscalconditions,the adapta-

bility of the Fiscal Constitutionis truly remarkable.Because theAmerican Constitutionis comparativelydifficult to amend,8it isfortunate that the Framers ncludedonly what they considered heminimum conditions for achieving their limited fiscal objectives.

The modestyand lack of specificityof the Fiscal Constitutionprob-ably accountforits durability.The lacunaein the writtenConstitu-tion have been filledby SupremeCourt nterpretationsandby stat-utes, which can be changedwhenconditionschange.As a result,thefiscal provisionsof the Constitutionhave been amendedonly once,and that amendment-the sixteenth-is generallyconsidered odayto have been the result moreof a mistakenSupremeCourtdecision9than of any defect in the Constitutionitself.

8 See U.S. CONST.rt.V.Probablyhe mostimportantbarrier o amendinghe Constitu-tion is that it cannotbe amendedby Congress lone,howevergreatthe majorityvotingforthe amendmentmaybe. In thisrespect he AmericanConstitutiondiffers rommostmodernconstitutions. In the Federal Republic of Germany, or example,the Basic Law can beamendedby the affirmative oteof a two-thirdsmajorityn boththe Bundestag, he popularhouse,and theBundesrat,anupperhousecomposed frepresentativesfthe Ldnderstates).GRUNDGESETZGG]art.79(2).

' Pollock v. Farmers'Loan& Trust Co., 158 U.S. 601, vacatingon rehearing157U.S.429 (1895), discussed in text at note 82 infra.

274 [44:271




A. The Role of State and Nation

In consideringthe formalstructure createdby the Constitution,one must bear in mind the role of the states in both constitutional

theory and currentpolitical reality. Fromthe standpoint of consti-tutional theory, the Americanstates are consideredto exist, in anabstract sense, priorto the federation.Thoughit was "We the Peo-

ple of the United States" who did "ordainand establish this Consti-tution for the United States of America,""0he legislative powersofthe federation are not plenary but limited to those delegated to itin the Constitution. Should anyone miss the point, the tenth

amendment to the Constitution declares that "[t]he powers notdelegated to the United States by the Constitution,nor prohibitedby it to the States, are reserved to the States respectively,orto the

people.""The legislative competence of the states thus exists indepen-

dently of the Constitution. The states are entitled to legislate with

respect to any subject whatsoever, except as they are specificallyprohibitedfromdoingso by the Constitutionoras federallegislation

is held as a result of the SupremacyClause to render state legisla-tion inapplicable.'2Here and there in the Constitutionwe do find

specific prohibitions,either because retentionof a particular powerby the states was thought by the Framersto be incompatiblewitha federal system (as in the case of the prohibition against statetreaties with foreignpowers)'3or because the Constitutionimposesa restrictionas part of its guaranteesof individual liberty (as in thecase of the prohibitionagainst deprivationof "life, liberty or prop-erty, without due process of law")."1A third possibility is that the

delegation of a powerto the federal government may be taken byimplication to withdrawthat powerfrom the states. For example,the delegationto the Congressof powerto "regulateCommercewith

foreign Nations, and among the several States"'5has been inter-

O0U.S. CONST.reamble.1James Madison, in presentingthe first ten amendmentsto the Constitutionto the

House of Representatives,noted that several of the state ratifyingconventionshad been"particularlyanxious that it should be declaredin the Constitutionthat the powersnot

thereindelegatedshould be reserved o the States." 1 ANNALSFCONG.58.AlthoughMadi-son suggestedthat the proposedtenth amendmentwas "superfluous" nd "unnecessary"since "the whole of the instrument" mplied the principleit established,he believedthat"therecan be no harm in makingsuch a declaration." d. at 459.

2 U.S. CONST. art. VI, cl. 2.'3 Id. art. I, ? 10, cl. 1.4 Id. amend. XIV.5 Id. art. I, ? 8, cl. 3.

1977] 275




preted to deny by implication the powerof the states to regulateforeignand interstate commerce n certaincircumstances.'6

The constitutionaltheoryand political reality of federal-staterelations have diverged. The general view in the United States,perhaps especially among academics, is that the federal govern-ment, farfromactingas a governmentof limitedpowers, s in politi-cal fact a governmentof comprehensivepowers,and that the stateshave been left to do what the federalgovernmentchoosesnot to do.

Thoughthe changein the roleof the nationalandstate governmentshas beengreatin this century,the dimensionsofthe change disguise

the extent to which the Americangovernmentremains genuinelyfederal in nature. Howeverone looks at the Americanstates, theyretainan independenceand vitality that is all the moreremarkablewhencomparedwiththe roleof the constituentunitsofother federalnations.

In comparisonwith the Ldnder (states) of the FederalRepublicof Germany, for example, the powers reservedto the Americanstates are considerable.In Germany he greatbulk of privatelaw is

federal, as can be seen by glancing at the GermanFederal Civil

Code,which sets forthin successivechaptersthe law of obligations(contracts,torts, and restitution), property,family law, and dece-dents' estates.'7Otherfederalstatutes governcriminal aw, corpora-tions, commercial law, and insurance.'8The Americanstates, in

contrast, are responsiblefor most of the law in all of these fields.And althoughAmericanwriters like to emphasizethe growingdis-

placementof state law by federalstatutoryregulation,state statu-

tory regulation of business probablyremains more significant in

terms of actual economicimpact than does federalregulation.'9Like the GermanLdnder, he states have largebureaucracies.In 1973 about one-eighthof the entireU.S. work orce(that is, over9 million people) was employedby state and local governments.20

" See SouthernPacificCo. v. Arizona,325U.S. 761(1945);Cooleyv. BoardofWardens,53 U.S. (12How.)299(1851).

17BGB [BurgerlichesGesetzbuch]?? 241-853(law of obligations);Id. ?? 854-1296

(propertyaw);Id. ?? 1297-1921familylaw);Id. ?? 1922-2385decedents'estates).18

The Strafgesetzbuch is the general criminal code of West Germany. TheHandelsgesetzbuchovernsmuchof whatAmericans all commercial aw and containsthebasic law of associationsand corporations, lthoughthere are additionalstatutes in bothareas. The Versicherungs-Vertragsgesetzoverns nsurance ontracts.

" Readerswho aresurprised ythisconclusion houldconsider,amongother actors, hevast amount of licensingof occupationsand businesses at the state and local level, seegenerallyGellhorn,The Abuseof OccupationalLicensing,44 U. CHI.L. REV. , 10-18 1976),and the profound conomic mportance f localland use regulation.

aADVISORYCOMM'NON INTERGOVERNMENTALELATIONS, IGNIFICANTEATURESOFFISCAL

276 [44:271




Unlike the German Lainder,however, which are responsible for

administeringmost federal

legislation,21Americanstate bureaucra-

cies administer primarily their own statutory law. Situations inwhich the states administerfederalstatutory law, such as the Food

Stamp Program,22re the exception. The U.S. federal governmentfinances many state programs through conditional grants-in-aid,and thus in practice may dictate the content of those state pro-grams, but this is a topic to which I shall returnlater.23Since mostfederal programsmust be administeredby the federal governmentrather than the states, the federal bureaucracyis also large. Over

2,800,000peopleworkforthe executivebranchof the federalgovern-ment (not including another2,100,000in the military services).24

The existence of local governmentsin the United States, againin contrast to Germany, is in no way guaranteed by the Constitu-tion.25They owe their competenceand whatever self-rulethey enjoyto state constitutions.26Consequently, the division of state taxingand spending powersbetweenstate and localgovernments s a ques-tion of state law.

B. The Separationof Powers

If we look moreclosely at the federalgovernment,otherimpor-tant featuresof the AmericanFiscal Constitutioncan be seen. Presi-

dential, as opposedto parliamentary,governmentplaces an empha-sis on the separation of powers or, perhaps the better phrase,"checks and balances" between the executive and the legislature.27The consequencein the United States has been the creationof a setof proceduralandjurisdictionalprinciples concerning he manner inwhich powers concededly vested in the national government as awhole are exercised.

FEDERALISM:TRENDS 31 (Table XXII) (1976) [hereinafter cited as TRENDS]. ust over one-

half of these employeesare in the publiceducationsector.21 GG arts. 83-85; see Kauper, The Constitutionsof West Germanyand the United

States: A ComparativeStudy, 58 MICH. . REV. 091,1150-52 1960).2 7 U.S.C. ?? 2019,2024(1970).

2 See text and notes at notes 163-74 nfra.24 SPECIALNALYSES978,

supranote 7, at 164(Table H-2). Thesefiguresdonot include

the legislativeandjudicialbranches.25 The GermanBasic Lawexpresslyguarantees he rightof municipalities Gemeinden)

to self-government.GG art. 28(2). At the same time, it must be recognized hat Americancities probablyhave moreautonomy n fact than do Germanmunicipalities.

MSee generally J. FORDHAM,LOCAL OVERNMENTAW48-107 (rev. ed. 1975). More than

thirty-fivestates have some form of constitutionalhome ruleformunicipalities,whilesomeseventeen afford home rule for counties. Id. at 73 nn.1 & 2.

27 See Casper,ConstitutionalConstraints n the Conductof ForeignandDefensePolicy:A Nonjudicial Model,43 U. CHI.L. REV. 63,484 (1976).

1977] 277




The "powerof the purse" ies in the Congressas a resultof theprovisionthat "[n]omoney shall be drawn fromthe Treasurybutin Consequenceof Appropriationsmadeby Law."28 he funds thatoil the machineryof the executivebranch are thus made availablethrough the same constitutional procedurefollowed in enactingother statutes. Appropriationsbills, like otherlegislation,must bepresentedto the President orhis approvalorveto,with the possibil-ity of an overrideof any veto by the votes of two-thirdsof bothHousesof Congress.2

Congresshas enactedtwo majorpiecesof budgetary egislation

that are of such importancethey deserveto be consideredpart ofthe Fiscal Constitution n its largersense. The first,enactedin 1921,governsthe executivepart of the budgetcycle; the second,enactedin 1974, governsthe legislative part. The Budget and AccountingAct of 192130establishes the frameworkwithin which the annualbudget cycle unfolds. The essence of the Act is that the Presidentis to proposeto Congresseach Januarya consolidatedbudget pro-posal. This "President'sBudget" lays out in massive detail thePresident'sfinancialplan forthe ensuingfiscalyear.31The Act was

designed to substitute central presidentialplanning for the priorpracticewhereby ndividualdepartmentsandagencies,or even sub-ordinatebureaus,submittedtheirappropriationequestsdirectlytothe Congress.32 lthoughthe President in his Budget merely pro-poses and the Congressby action or inaction disposes, the Presi-dent's Budget tends to set the framework or the ensuing congres-sional and public debate, especiallywhen a Presidentis willing touse his politicalcapitalandhis constitutionalveto power n support

of his Budget.As the rangeof governmentalactivities has expandedin recentdecades, the annual executive branchbudget cycle supervised by

28U.S. CONST. rt. I, ? 9, cl. 7. This clause further requires that "a regular Statementand Account of the Receipts and Expenditures of all public Money shall be published fromtime to time." Id.

2Budget and Accounting Act of 1921, ch. 18, 42 Stat. 20 (codified in scattered sections

of 31 U.S.C.).30Until calendar year 1976 (fiscal year 1977) the fiscal year ran from July 1 to June 30;

fiscal years now begin on October 1. 31 U.S.C. ? 1020 (Supp. V 1975).31 For a description of the budgetary process priorto 1921, see U.S. PRESIDENT'SCOMM'N

ONECONOMYND EFFICIENCY,HENEEDFORA NATIONALUDGET, .R. Doc. No. 854, 62dCong., 2d Sess. 13-128 (1912).

32 Prior to 1939 the Bureau of the Budget was located in the Treasury Department,although even then it reported directly to the President. In 1970 the Bureau of the Budgetbecame the present-day Office of Management and Budget. Reorganization Plan No. 2 of1970, 31 U.S.C. ? 16 (1970).

278 [44:271




the Officeof ManagementandBudget (OMB)has becomemore andmore a

planningand

policy-making process.The

budget cycleis

typically a bruising bureaucraticand political struggle in which amultitude of executive branchagenciesstrive to increasetheirshareof the budgetarypie while the OMBattempts to fit proposedoutlayswithin a presidentially-set spending target. When agreement be-tween an agency and the OMB is not possible, the President mustdecide. Those decisions are in no sense cabinet decisions, as wouldbe the case in many other governments.Nor is the Secretaryof the

Treasury as important in the process as are finance ministers in

other countries. It is characteristicof the U.S. presidential systemthat the budgetary responsibility is vested in an agency within theExecutive Officeof the President (that is, the OMB) ratherthan ina ministry of finance, as in nearly all other countries.33Thus, the

Secretaryof the Treasury plays a role not greatlydifferentfromanyother cabinet member,except insofar as the Treasury s able, as the

taxing department, to advise the President on the revenue side ofthe revenue-expenditure edger.

The secondmajorpiece of budgetary egislation-the 1974Con-

gressional Budget and Impoundment Control Act-cannot be un-derstood without some appreciation of the traditional distinctionbetween the authorization and the appropriationof expenditures.Traditionally,an authorizationbill, which is also subjectto a presi-dential veto, precedes the passage of an appropriationsbill. In ef-

fect, an appropriationhas to pass muster twice in both Houses,oncebefore a legislative "authorizing"committee and once before an

appropriationscommittee. There was a time when the House and

Senate AppropriationsCommitteeswere able to pass on the annualbudget as a whole. A growing rend, however,has been the develop-ment of "backdoorspending" techniques in which the appropria-tions processis short-circuitedby formsof authorizationthat effec-

tively removeany discretionin either the Congressorthe Presidentto refuse to consent to the appropriation.34 hese legislative tech-

niques involve such esoteric fiscal devices as trust funds, contract

authority, and entitlements.35Some such devices exclude the Ap-

33 U.S. CONST. rt. I, ? 7.34 See JOINT STUDY COMM. ON BUDGETCONTROL,RECOMMENDATIONSORIMPROVING ON-

GRESSIONALONTROLVER UDGETARYUTLAYNDRECEIPTSOTALS, .R. REP. No. 147, 93d

Cong. 1st Sess. 10-12 (1973). See generally HOUSECOMM.ONTHEBUDGET,5THCONG.,1ST

SESS., CONGRESSIONALONTROLFEXPENDITURESComm. Print 1977).

35Trust funds do not usually involve a trust in the private law sense but simply a

statutory earmarking of particular receipts for outlays in a related area, with any surplus of

receiptsoveroutlaysinvestedin U.S. Treasury ecurities.Contractauthoritypermitsgovern-

1977] 279




propriationsCommitteesentirely fromthe process.Otherspresentthe AppropriationsCommitteeswith the alternativeof appropriat-ing fundsor forcingthe federalgovernment o defaulton its obliga-tions. Regardlessof the deviceused, appropriations ommitteesaredivested of any role in determiningthe level of public spending.36

The growthof backdoor pendingtechniquescannot be attrib-uted to a desire to circumvent he President'sveto power.Backdoorspendingdoes not in theory limit the veto powerof the Presidentbecausethe Presidentmay veto the originalauthorizing egislation(althoughany particularPresidentof coursemayfind that the legis-

lation was enacted during the tenure of one of his predecessors).Instead, the primestimulus forthe developmentof most backdoor

spendingtechniqueshas been the aspirationof specializedlegisla-tive committees of Congress, many of whom adopt an advocacyposture toward the programsthey review, to bypass the fiscallymoreconservativeand legislativelyless specializedAppropriationsCommittees.

Backdoorspending,which nowaccountsforclose to one-halfofany year'sfederaloutlays, has increasinglyconverted he presiden-tial budgetaryfunctionfromone of proposing o Congresshow taxand borrowingrevenuesshould be spent to one of estimating ex-pendituresalreadyeffectivelycommittedunderprioryears'legisla-tion. Today the combinationof backdoorspendingtechniquesandthe momentumof prioryears'appropriationsdictates the contentof roughlythree-quartersof each year's expenditures.37 hese so-called uncontrollableoutlays38will be made unless legislation is

ment agencies to enter into construction or procurement contracts, with the AppropriationsCommittee relegated to the clerical function of paying the obligations when they become due.Entitlement programs create rights in individual citizens, for example to food stamps orwelfare payments, with the result that Congress has no option but to appropriate funds tomeet those obligations.

s Other phenomena that arguably constitute a form of backdoor spending are so-calledtax expenditures-the subsidization of specific types of activity through the allowance ofincome tax deductions or credits for expenses related to that activity. See generally S. SUR-REY,PATHWAYSOTAXREFORM:HECONCEPTFTAXEXPENDITURES1973), reviewed in Blum,Book Review, 1 J. CORP.TAX.486 (1975). Congress took a small step toward regulating taxexpenditures in the Budget and Impoundment Act of 1974 by requiring the President to

prepare an annual "tax expenditure budget" for submission to Congress. 31 U.S.C. ? 11(Supp. V 1975).

37 OFFICEOFMANAGEMENTNDBUDGrE, BUDGETOF THEUNITEDSTATESGOVERNMENT,IS-CALYEAR 978, at 420-21 (Table 16) (1977) [hereinafter cited as 1978 BUDGET].

38 Uncontrollability is a technical concept. Much of the remaining one-quarter of thebudget may not be controllable as a political matter. For example, most of the DefenseDepartment budget is technically controllable because manpower costs constitute over halfof the defense budget, but that does not mean that Congress could be expected to reducedefense budget outlays sharply in any particular year.

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enacted to stop them. In practice, therefore,the escalating use ofbackdoorspendingtechniques has effectivelyreversedthe textbook

notion that Congress through the legislative process affirmativelydecides upon the amount and content of each year's expenditures.

The budget portionof the 1974CongressionalBudget and Im-

poundment Control Act39bears an interesting parallel to the 1921

Budget and AccountingAct. Whereas the 1921Act was designedto

permit the executive branch to function as a unit in budgetarymatters, the 1974 Act is designed to do the same for the Congress.After the President'sBudget is submitted in Januaryforthe ensuing

fiscal year (to commenceon October1), the Congress s requiredtopass a concurrentresolutionby May 15establishinga recommendedlevel of budgetary authority and outlays, both for the governmentas a whole and for each majorfunctional categoryof spending.Thenormalappropriationsprocessthen proceeds,but by September15the Congressmust pass a secondconcurrentresolution,eithermodi-

fying its earlier resolutionto reflect the resultsof the appropriationsprocess or making recommendations for changes in appropriationsor taxation to reconcile them with the overall totals in the second

resolution.40Perhaps more important than this statutory proce-dure-which cannotby its ownforceensurebudgetarycontrolortheadherence of the Congressto its own proceduresand deadlines-isthe creation of a CongressionalBudget Office (CBO) and BudgetCommittees in both houses.41The CBO is expected to develop thekind of expertise that has made the OMB professionalstaff so im-

portant and effective in the executive branch budget process, andthe Budget Committees will providea counterweightto other con-

gressional committees that are more interested in individual pro-grams than overall fiscal policy. Although the mechanisms of the1974 Act are shot throughwith exceptions designedto protect someof the same programsthat had been the beneficiariesof backdoor

spending techniques,42he first results underthe statute have been

gratifyingto proponentsof fiscal responsibility.

39 31 U.S.C. ?? 1301-1353Supp. V 1975).40The proceduresprescribedby the new Act are set forthat 31 U.S.C. ?? 1321-1353

(Supp. V 1975).4' 2 U.S.C. ?? 601-604(Supp. V 1975).42 SocialSecurity, highway,and most othertrust funds as well as generalrevenue haring

are exempt. 31 U.S.C. ? 1351(d)(Supp. V 1975). Moreover,f a programhas been shelteredfrom the currentyear'sbudget process by past years' authorizing egislation,an improvedbudget processcan do little morethan to estimate (as opposedto prescribe) he amountof

spendingon that program.Hence, althoughnew entitlementprogramsare subject to the

congressionalbudget process,see 31 U.S.C. ? 1351(b)(Supp. V 1975),an increasein esti-

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The impoundment control portionof the 1974 Act43was de-

signedto resolvea steadilygrowingpoliticalandconstitutional ssue

concerningthe President'sduty to spend appropriated unds. Al-though Presidents had long refused to spend certain appropriatedfunds pursuantto narrowlycircumscribedauthorityundervariousstatutes,4 the assertionby PresidentNixon of a constitutionalrightto refuse to spend appropriatedfunds,45 oupled with a broader

presidentialview of the relevant statutory authorities, led to the

impoundmentcontrolprovisions n the 1974Act.46The Act requiresthe Presidentto reportall proposalsto reserveappropriated unds

(broadly called "impoundments")to the Congress.Proposalstodefer expenditures are effective under the statute unless eitherHouse disapproves.Proposalsto rescind, as opposedto defer, be-come effective only on approvalof both Houses. Unfortunately,aPresident's deferralmay be viewedby a legislatoras a rescission,acircumstancesuggesting hat the 1974Acthasnot completelyelimi-nated the impoundment ssue frompotential separation-of-powerscontroversies.

C. Limitationson State TaxationThe Constitutionplaces a numberof constraintson state taxa-

tion. Most of these constraintsare intendedto preventstates from

matedspendingunderexistingentitlementprogramsends to result n larger verallcongres-sionalbudgettotals unless the decision s taken to cut othermorecontrollable rograms. eeCONGRESSIONALUARTERLY,GUIDE OTHECONGRESS32-33 (2d ed. 1976).

4331 U.S.C. ?? 1400-1407Supp.V 1975).4 Thesestatutes arecollected n Statementof Information,HearingsBefore he House

Comm.on theJudiciary oInvestigatewhetherSufficientGroundsExist toImpeachRichardM. Nixon, 93d Cong.,2d Sess., BookXI, 57-75(1974).

5 See Impoundment fAppropriated undsby the President:JointHearingson S. 373Beforethe Ad Hoc Subcomm.on Impoundment f Fundsof the Senate Comm.on Govern-ment Operations nd the Subcomm.on Separationof Powersof the Senate Comm.on theJudiciary,93dCong.,1stSess.364(1973) statementofJosephT. Sneed,DeputyAtty.Gen.).

4"Recentcourtdecisionshave also beenon the wholehostileto presidentialmpound-ments. As a matterofstatutoryconstruction ourtshavebeenreluctant o findthatCongressintended o conferdiscretionuponthe executivebranch o withholdappropriatedunds.See,e.g., Kennedyv. Mathews,413F. Supp. 1240,1245(D.D.C.1976); ee also Trainv. CityofNewYork,420US. 35(1975).Lower ourtdecisionshavealsodeveloped distinctionbetween

impoundmentsor program-relatedeasonsand impoundmentsorcollateralreasons,uni-formly nvalidating he latter.See State HighwayComm'nv. Volpe,479F.2d1099(8thCir.1973);Dubosev. Hills, 405F. Supp. 1277(D. Conn.1975);Cityof LosAngelesv. Coleman,397F. Supp.547(D.D.C.1975)(collectingcases).Occasionally ourtshavealsoapplied hisdistinctionto sustaindiscretionarympoundments. ee Pennsylvaniav. Lynn,501 F.2d848(D.C. Cir.1974).The contention hat the Presidenthas inherentconstitutionalauthority oimpound undshas beenalmostuniformly ejected.See Louisiana x rel. Gustev. Brinegar,388 F. Supp. 1319(D.D.C. 1975)(collectingcases); Guadamuzv. Ash, 368 F. Supp. 1233(D.D.C. 1973).

282 [44:271




using their taxing powers to raise revenue on activities or personsoutside the state (sometimes called "tax exporting")or fromusingtaxes to protect local economic interests fromout-of-state competi-tion. The former imit corresponds o a territorialconceptionof state

jurisdiction and ensures that state taxation is confined within astate's borders. The latter limit derives from the propositionthatthe Constitution was intended to create a free trade area and thatit is not permissible for the Americanstates to engage in the kindof economic protectionismso commonly practiced by nation-statesin the international community. Both of these limits have been

derived by the Supreme Court from general language that wasplaced in the Constitutionby the Framersforbroaderpurposes.For

example, the Due Process Clause is sometimes invoked to protectthe territorialobjective,47nd the CommerceClauseis often invokedto achieve the free trade objective.48

The only constitutional limitation directed expressly to statetaxation is the Import-ExportClause:

No State shall, without the Consent of the Congress, lay any

Imposts or Duties on Importsor Exports, except what may beabsolutely necessaryforexecuting its inspectionLaws;and thenet Produce of all Duties and Imposts, laid by any State on

Importsor Exports, shall be forthe Use of the Treasuryof theUnited States; and all such Laws shall be subject to the Revi-sion and Control of the Congress.49

Althoughthis express prohibitionhas been construed to applyonly to international and not to interstate trade,50t nonetheless

serves both the territorialconfinementand the freetradeobjectives,albeit imperfectly. The fear that the great port states would take

advantage of their key locations to levy tribute upon imports from

foreignlands destined for other states was a prime justification forthe Import-Export Clause. Under the Articles of Confederation,

47See, e.g., UnionRefrigeratorTransit Co. v. Kentucky,199U.S. 194,204 (1905).4RSee, e.g., Freeman v. Hewitt, 329 U.S. 249, 252 (1946). Courtsoften confuse the

territorialandfreetradeobjectives,and the SupremeCourthas sometimesexplicitlyrefusedto distinguish sharplybetween them. See, e.g., NationalBellas Hess, Inc. v.

Departmentof

Revenue,386 U.S. 753, 756 (1967).49 U.S. CONST.rt. I, ? 10, cl. 2. A relatedlimitation is the provision, ound in art. I, ?

10, cl. 3, that "no State shall, without the Consentof Congress, ay any Duty of Tonnage."A "Dutyof Tonnage" ncludes"all taxes and dutiesregardlessof theirmannerorform,andeven thoughnot measuredby the tonnageof the vessel,whichoperate o imposea charge orthe privilegeof entering,tradingin, or lying in a port." ClydeMalloryLinesv. Alabamaexrel. State DocksComm.,296 U.S. 261, 265-66(1935).

50 Woodruff . Parham,75 U.S. (8 Wall.) 123(1868).

1977] 283




"NewJersey,placed betweenPhiladelphiaand New York,was lik-ened to a Cask

tappedat both

ends;and North Carolinabetween

Virginiaand South Carolina o a patient bleedingat both Arms."51

Throughthe Export-ImportClausethe Framers oughtto eliminatethis limited but economicallysignificantinstance of state taxation

having an incidencebeyondthe confinesof the state.The Import-Export Clause had another purpose as well-to

ensure that the power grantedto the Congress o "lay and collect. . Duties [and] Imposts"52would be a monopoly power. The

federalgovernmentwouldthus be able to adopta commercialpolicy

responsiveto the overallinterestsof the new nation, balancingthedesire of one state to protect its industries against the desire ofanother to benefit from the lower consumer prices attainable

throughfree trade. Hand in hand with the objectiveof giving thenationalgovernment he sole rightto make tradeoffsbetweenprod-ucerandconsumer nterestswasthe objectiveof assuring he federal

governmenta secure sourceof revenues.Since, as we shall see, the

powerto tax propertywas to be reserved to the states,53 he chiefsourceof federalrevenuewas

expectedto be (andwas in fact until

the Twentieth Century)customsrevenue. The successof the Foun-ders'greatventuredepended upon preservinga nationalmonopolyovercustoms revenue.54

Becausethe Import-ExportClauseappliesonlyto international

commerce, the principal constitutional limitations on the statesmust be implied, as suggestedabove,from moregeneralclauses.Todo so has been one of the great, and never finished, tasks of the

Supreme Court. The most interesting developmenthas been the

Court's interpretationof the CommerceClause. On its face, theCommerceClause does no more than grant to Congress he power"[t]o regulate Commerce with foreign Nations, and among theseveralStates, and withthe IndianTribes."55ut bynegativeimpli-cation the congressionalpowerto regulateinterstate commercehasbeen construed to deprivethe states of the powerto regulatesuch

51 Madison, Preface to Debates in the Convention of 1787 in RECORDSOF THECONSTITU-

TIONALCONVENTION F 1787,at 542(M. Farrand d. 1937)(abbreviationsn original ext are

spelledout).52 U.S. CONST. rt. I, ? 8, cl. 1.53 See text at note 81 infra.54On the purposesof the Import-ExportClause,see MichelinTireCorp.v. Wages,423

U.S. 276, 283-94 1976);Youngstown heet &TubeCo.v. Bowers,358U.S. 534,551(1959)(Frankfurter,., dissenting);Brownv. Maryland, 5U.S. (12 Wheat.)419(1827);Hellerstein,Michelin Tire Corp. u. Wages: Enhanced State Power to Tax Imports, 1976 SuP. CT. REV.99.

55 U.S. CONST.rt. I, ? 8, cl. 3.

284 [44:271




commerce in certain circumstances, even with respect to activities

Congresshas not soughtto regulate.56Moreover, his implied limita-

tion on the states' regulatorypowerhas been extendedto limit statetaxation of interstate commerce.57

Many thousands of pages of the U.S. Reports have been de-voted to the subject of determiningjust what state taxation is pre-cluded by the Commerce Clause. It wouldhardlyserveourpurposehere to review the state taxation cases when no less a scholar and

judge than Justice Frankfurterhas declared:

The historyof this problemis spreadoverhundredsof volumes

of ourReports.To attempt to harmonizeall that has been saidin the past wouldneitherclarifywhat has gonebeforenorguidethe future. Suffice it to say that especially in this field opinionsmust be read in the setting of the particularcases and as the

productof preoccupationwith their special facts.58

But it would be a mistake to leave the impressionthat goods im-

ported into a state from another state, and the income earned

thereby, are totally immune from taxation in the importingstate.

Whena tax is nondiscriminatoryandfairlyapportioned-and hencedoes not serve to protect local industry, to impose overtly the bur-den of taxation on citizens of other states, or to subject interstatebusiness to a cumulative or multiple tax burden not borneby localbusiness59-chancesarethe tax will be upheldagainstconstitutional

objections.Certainly,the fact that a business firmoperatesin inter-state commerce will not prevent a state from taxing an aliquotportion of its sales or income.60Perhaps the best summary of thesituation is still to be foundin a

half-centuryold article

byProfessor

Thomas Reed Powell:

Law, like politics, makesstrangebedfellows.Amongthe queer-

" Cooleyv. Boardof Wardens,53 U.S. (12 How.) 298 (1851).57 See, e.g., Case of the State FreightTax, 82 U.S. (15 Wall.) 232 (1873).The foreign

commerceportionof the CommerceClausealso restricts state taxationand to that extent

duplicatesthe Import-ExportClause. Brownv. Maryland,25 U.S. (12 Wheat.)419 (1827).58 Freemanv. Hewit, 329 U.S. 249, 252 (1946).s, On the multipleburdentest, see WesternLive Stockv. Bureauof Revenue,303U.S.

250, 258, 260 (1938);Hellerstein,State Taxationof Interstate Business and the SupremeCourt,1974Term,62 VA.L. REV. 49,150-51(1976).

60 CompleteAutoTransit,Inc. v. Brady,97 S. Ct. 1076(1977)(salestax); NorthwesternStates Portland CementCo. v. Minnesota,358 U.S. 450 (1959)(net incometax). The Con-

gresshasrepeatedlyattemptedwithoutsuccessto enactcomprehensiveegislation hatwould

providea formulafor allocatingthe incomeof interstate businessesamongthe states. At

present many states have adheredto a Multistate Tax Compactwith roughlythe same

objectives.See Hellerstein,State Taxationof Interstate Business and the SupremeCourt,1974Term,62 VA.L. REV. 49, 153-54,nn.22& 23 (1976).

1977] 285




est of such companionsare the doctrinethat the states cannottax interstate commerceand the fact that

theycan. As

mightbe anticipated, the doctrineand the fact do not dwelltogetherin perfectamity. The effortsof the SupremeCourtto mediatebetween them have as a rule failed to give full satisfactiontoeither. . . . The truth is that there is a wrongway and a rightway forthe states to tax interstate commerce.When the wrongway is adopted, the doctrine maintains its supremacy.Whenthe right way is chosen, the fact prevails. The doctrinethensaves its face by the nominalisticlegerdemainof asserting hat

what is being taxed is not interstatecommercebut somethingelse. This somethingelse is usuallycalledproperty. . . . Thusby renaming, the cabbage becomes a rose, and the doctrinethat the states cannot tax interstatecommercestill struts as auniversalthoughpalpablyit is somethingless.6'

Whena state taxes what is clearly property, ncome,or activi-ties within its borders,and thus does not raise issues of protection-ism, extraterritoriality,or multiple burdens,there are few federal-

constitutionallimitations on its powers.Of course,the states havetheir own constitutions, and these instruments may impose sub-stantial limitations on a state's choice of the types and maximumamounts of taxes to impose.62But the federal Constitution limitsneither the kinds of taxes that may be imposednor the maximumrate of tax. As the SupremeCourthas repeatedlysaid, even a statetax so burdensomeas to destroy a business does not violate theConstitution."3

Taxation,likeanyotheract of a state, is subjectto the constitu-tional guaranteesof individualliberties.Thus, a tax bearingselec-

tively on speech or the exerciseof religionwouldlikely runafoulofthe first amendment.64 erhapsthe principalgeneralconstitutional

6' Powell, State Income Taxes and the Commerce Clause, 31 YALE L.J. 799, 799-800

(1922).62 The Illinois Constitution, for example, forbids the legislature to enact a graduated

income tax, prohibits counties from assessing real property used in farming at a higher levelthan single family residential property for property tax purposes, and mandates the eventual

abolition of local ad valorem personal property taxes. ILL.CONST. art. 9, ?? 3(a),4(b),5(c).63 Stewart Dry Goods Co. v. Lewis, 294 U.S. 550, 562-63 (1935); Rox v. Standard Oil Co.,

294 U.S. 87, 99-100 (1935); A. Magnano Co. v. Hamilton, 292 U.S. 40, 45-46 (1934); AlaskaFish Salting & By-Products Co. v. Smith, 255 U.S. 44, 48-49 (1921).

64 See Grosjean v. American Press Co., 297 U.S. 233 (1936); Murdock v. Pennsylvania,319 U.S. 105 (1943); Follett v. McCormick, 321 U.S. 573 (1944). Although the first amend-ment by its terms limits only congressional legislation, its guarantees have been held applica-ble to the states by the fourteenth amendment. See, e.g., Cantwell v. Connecticut, 310 U.S.296 (1940).

[44:27186




safeguard used to strike down state tax legislation has been the

Equal Protection Clauseof the fourteenthamendment.65 tate clas-sifications of taxpayersand their activities forpurposesof applyingdifferingtaxes or tax rates might be held so discriminatoryor arbi-

trary as to transgressthe Equal Protection Clause,66 ut states are

ordinarilygivenwide discretionin these matters.67 he principaluseof the Equal Protection Clause has been to strike down state taxstatutes discriminating against out-of-state corporations68-afur-ther illustration of the point that the Supreme Court's primaryconcernhas been with restrictingthe powerof the states to cast the

burden of local taxation on those outside the state orto protectlocalbusiness.

D. Limitations on Federal Taxation

The taxing power of the federal government is even freer of

express constitutional limitations than is the state power.As in thecase of the states, the federalgovernmentis limited in its powertotax speech and the exerciseof religion,and it may not use the taxing

powerin violation of due processorequalprotection.69 ut since thefederal government is vested with the power to protect domestic

enterprise through the imposition of "Duties" and "Imposts" on

imports, and to regulate commerce under the CommerceClause,there is correspondinglyess scope for these protectionsto operate.

A procedurallimitation is placed on the decision to tax: "AllBills forraisingRevenueshall originatein the Houseof Representa-

65 The DueProcessClauseofthe fourteenthamendmenthas had its principalapplicationto state taxationthrough ts limitation on the territorial eachof a state's taxingpower.Seenote 47 supra.But the Due ProcessClauseis also sometimes held to limit the measureof atax, as wherea state improperlymputesthe income of one person o another.Hoeperv. TaxComm'n,284 U.S. 206(1931).A provisionof someimportancen constraining tate discrimi-nation against nonresidentsis the privilegesand immunities clause of art. IV, ? 2. SeeMullaneyv. Anderson,342 U.S. 415 (1952);Toomerv. Witsell, 334U.S. 385 (1948).

66See, e.g., QuakerCity Cab Co. v. Pennsylvania,277U.S. 389 (1928).7 The SupremeCourt in recent decades has refused to hold classificationsaffecting

property, ncome,or activities that are purelyinternalto the taxingstate unconstitutional.See Kahnv. Shevin,416U.S. 351(1974);Lehnhausenv. LakeShoreAuto PartsCo.,410 U.S.356 (1973).Recentcasesstrikingdown state taxingstatutes on equalprotectiongroundsare

state courtdecisions,usuallyrelyingon equal protectionclausesin state constitutions. Seenote 139infra.

" WHYY,Inc. v. Glassboro,393 U.S. 117 (1968);WheelingSteel Corp.v. Glander,337U.S. 562 (1949).

69 Althoughthe Equal ProtectionClauseof the fourteenthamendmentdoes not applyto the federalgovernment,he fifth amendmenthas beenheldto prohibitdiscriminationhat"may be so unjustifiableas to be violative of due process."Bollingv. Sharpe,347U.S. 497,499 (1954).

1977] 287




tives."70 t was the practice in Britain for money bills to originatein the lowerhouse, and a similarpracticehad been followed in the

American states.7"But this limitation had a special significanceunder the new Constitution since Senators were elected by theirstate legislaturesratherthan directly by the peopleof their states.72

Moreover,as part of a fundamental constitutionalcompromise, hemore populousstates were more heavily represented n the Housethan in the Senate, where each state had two members.

The only expresssubstantivelimitation on the subject matterof federaltaxation is the provisionthat "[n]oTax or Duty shall be

laid on Articlesexportedfromany State."73This prohibition,whichapplies only to exports from the United States and not to exportsfrom one state to another,74orrespondsn scope to the exporthalfof the Import-ExportClause limitation on state taxation. But theFederal Export Clause had a somewhat differentpurpose.It was

originallyintended as a guaranteeto the Southernstates that themorepopulousNorthernstates wouldnot seek to financethe federal

governmentthrougha levy on Southernagriculturalexports.75The most important constitutional provisionsbearingon the

federal government'spowerto tax are the Uniformityand Appor-tionment Clauses.They do not in terms restrict the kinds of taxesthe federal government may levy, but they nonetheless do so in

practice.The UniformityClauserequires hat "all Duties, Impostsand Excises shall be uniformthroughout he United States."76The

ApportionmentClause, on the other hand, provides that "[n]oCapitation, or other direct Tax shall be laid, unless in Proportionto the Census orEnumerationhereinbeforedirectedto be taken."77

The key distinctionis whethera federal tax is an indirecttax (thatis, a "duty, impostorexcise")in whichcase uniformity s required,or a direct tax, in which case apportionment s required.

70 U.S. CONST. rt. I, ? 7. This provisiongoes on to permitthe Senate to "proposeorconcurwith amendmentsas on otherBills." JamesMadisonexplainedas follows he reason

for this amendingpower n the Senate:"Whenyou send a bill to the Senate, without the

powerofmakinganyalteration,youforce hemtoreject hebill. . . .The powerofproposingalterations removes this inconvenience ..."3 DEBATESFTHEFEDERALONSTITUTION76

(J. Elliot ed. 1836)." D. HUTCHISON,HEFOUNDATIONSFTHECONSTITUTION3 (1975).72 U.S. CONST. rt. I, ? 3.

'3 U.S. CONST.rt. I, ? 9, cl. 5.

Turpin v. Burgess, 117 U.S. 504, 507 (1886).5 See D. HUTCHISON,HEFOUNDATIONSFTHECONSTITUTION43-44, 151 (1975).' U.S. CONST. rt. I, ? 8, cl. 1.

77 Id. art. I, ? 9, cl. 4. The ApportionmentClauseis bolsteredby the CensusClause,whichstates that "Representativesnd directTaxesshallbe apportioned mong he severalStates . . . according to the respective Numbers." Id. art. I, ? 2, cl. 3.

288 [44:271




Uniformityis relatively easy to achieve. The requirementrefersto geographical uniformity.78Whereveran activity or article ap-pears, it must be taxed at the same rate.79 f liquor,for example, isproduced in Kentucky and not in New York, then a tax on themanufactureof liquor is nonetheless uniformthough no New York

enterprisepays the tax.80

Apportionmentis another matter entirely. If a tax is a directtax and thereforemust be apportionedin accordancewith the pre-vious census, then the amount of tax raised per capita must be thesame in each state. Only a capitation tax (involving a per-person

levy) would be likelyto lend itself to apportionment.Propertytaxes,which are likewise direct taxes, could meet the apportionmentre-

quirement only if the rate wereset at a different level in each stateso that the yield from the tax was in accordancewith population.Apportionmentof propertytaxes wouldbe an administrativelydiffi-cult undertaking,though propertytaxes were imposed by the fed-eral governmentand apportioned among the states on a number ofoccasionsin the Eighteenth and Nineteenth Centuries.8sThe conse-

quence of the ApportionmentClause is to leave the taxation of realand personalpropertyto state and local governments.Propertytaxcollections have consistently been the most important source oflocal governmentrevenue.

The ApportionmentClausehas been modifiedby the sixteenthamendment. That amendment was a responseto the 1895decisionin Pollock v. Farmers'Loan& TrustCo.,82wherethe SupremeCourtheld that the newly enacted federal incometax was a direct tax (onthe theory that a tax on income fromproperty s in substance a tax

on the underlying property)and hence unconstitutional because itwas not apportioned among the states. The sixteenth amendment,ratified in 1913,made clear that Congressmight tax "income, fromwhateversourcederived,without an apportionmentamongthe sev-eral States, and without regardto any census or enumeration."

Today both the federalgovernmentand nearlyall of the states(and to an increasing extent local municipalities) derive revenuesfrom income taxes, with the federal government collecting $173.0billion and the state and local governments collecting $28.8 billion

78 Knowlton v. Moore, 178 U.S. 41, 92 (1900).79Head Money Cases, 112 U.S. 580, 594-95 (1884).so S. MILLER, ECTURESNTHECONSTITUTIONFTHEUNITED TATES40-41 (1891).8' The statutes are discussed in Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, 572-

73 (1895).82 158 U.S. 601, vacating on rehearing 157 U.S. 429 (1895).

1977] 289




frompersonaland corporate ncometaxes in 1976.83 ach jurisdic-tion imposes its own tax, and the definitions, exceptions, deduc-

tions, and rates differbetween federal law and state law as well asamongthe states. Nonetheless,an increasingnumberof states haveconformed heirpersonal ncome tax statutes to federal aw to bene-fit the taxpayerby eliminatingthe need to file completelydifferentincometax returnswith the two levels of government.84

E. IntergovernmentalTax Immunities

One of the most important constitutionalrestraints on both

federal and state taxation is not to be found in the text of theConstitution at all. This is the doctrineof intergovernmental ax

immunities, a doctrine which the SupremeCourthas found in thefederal structureof governmentcreatedby the Constitution.85 hecoreof this doctrine is that the federalgovernmentmay not tax the

states, and the states may not tax the federalgovernment."The

powerto tax involves the powerto destroy,"said Justice Marshallin the landmarkcase ofMcCullochv. Maryland, 8 wherea discrimi-

natory state tax on bank notes issued by the Bank of the UnitedStates, a federally charteredbank, was held unconstitutionalbe-cause it interfered with an instrumentality created by the

"necessaryand proper"exerciseof express congressionalpowers.87As illustratedby this first case, where80%of the stock of the

Bank was held by privateparties, the key questionin definingthe

scopeof intergovernmentalmmunitiesis whetherthe objectof tax-ation is "so assimilatedby the Governmentas to become one of itsconstituent parts."88n the absence of either constitutionaltext or

anywell-defined heoryjustifyingthe immunity,this questionis not

R3ADVISORYOMMISSIONN NTERGOVERNMENTALELATIONS,IGNIFICANTEATURESFFIS-

CALFEDERALISM976-77: REVENUEANDDEBT 10 (Table 5) (1977) [hereinafter cited as REVENUE

ANDDEBT].s4Id. at 290 (Table 110).5 Earlier cases derived the immunity of states from federal taxation from the tenth

amendment, see, e.g., Collector v. Day, 78 U.S. (11 Wall.) 113 (1871), discussed in text atnote 89 infra. Federal immunity from state taxation is often derived from the SupremacyClause of art. VI. See, e.g., United States v. County of Fresno, 97 S. Ct. 699, 700, 702 (1977).

The soundest view, however, appears to be that the doctrine of intergovernmental tax immun-ity is implied by the overall federal structure created by the Constitution. See C. BLACK,STRUCTURENDRELATIONSHIPNCONSTITUTIONALAW , 11, 13-15 (1969).

s8 17 U.S. (4 Wheat.) 316, 431 (1819).7 Art. I, ? 8, cl. 18 of the Constitution grants Congress power "[t]o make all Laws which

shall be necessary and proper for carrying into Execution" other powers of the federal govern-ment.

RR United States v. Township of Muskegon, 355 U.S. 484, 486 (1958).

290 [44:271




easily answered. After Collectorv. Day,89an 1871decision holdingthe

salaryof a state

judgeimmune fromfederal

taxation,the

scopeof intergovernmental mmunities graduallyexpanded until in 1928

royaltieson federalpatents wereheld immune from state taxation.90

Thereafter,the scope of the immunity was drasticallyreducedby aseries of Supreme Court decisions.9'But something of the doctrineof intergovernmentaltax immunities remains, as the Court madeclear in the courseof denyingthe State of New Yorkimmunity fromfederal taxation on sales of mineral water fromstate-owned mineral

springs.92Chief Justice Stone, speaking for four members of the

Court, cited as examples of what would remain immune fromfed-eral taxation the "State's capitol, its State-house, its public schoolhouses, public parks, [and] its revenues from taxes or schoollands."93

Today the principalfiscal consequenceof the doctrineof inter-

governmentaltax immunities is the exemption of interest on stateand local bonds from federal income tax. This "municipal bond"

exemption will cost the federal treasury over $5.3 billion in fiscal1978.94

ax-exemptbonds can be sold at a much lower rate of inter-

est than would be required f the interest were taxable to the recipi-ent. Thus the exemption, which has been written into the InternalRevenueCode,95an be viewed as a disguisedsubsidyto municipali-ties, whose construction programsare financed largely by bonds.

Althoughthe SupremeCourt in the Pollock case unanimouslyheldinterest on municipal bonds exempt from federal income tax on

intergovernmentalimmunity grounds,96he general view today isthat the Courtwouldprobably uphold legislative elimination of the

exemption.97

89 78 U.S. (11 Wall.) 113 (1871).90Longv. Rockwood,277U.S. 142(1928).9' Forexample,Fox Film Corp.v. Doyal, 286U.S. 123(1932),overruledLongv. Rock-

wood, 277 U.S. 142 (1928),and Gravesv. New York ex. rel. O'Keefe,306 U.S. 466 (1939),overruledCollectorv. Day, 78 U.S. (11Wall.) 113(1871).

92 New Yorkv. United States, 326U.S. 572 (1946).93Id. at 587-88.Justice Frankfurtermadethe same point in his opinion,joinedonly by

Justice Rutledge,announcing he judgmentof the Court.Id. at 582.The recent decisionin

NationalLeagueof Cities v. Usery,426U.S. 833 (1976),althoughnot dealingwith taxation,demonstrates he continuedvitality of the intergovernmentalmmunityprinciple.

94 SPECIALANALYSES1978, supra note 7, at 129 (TableF-l). A correspondingxemptionof interest on federal bonds from state and local taxation is also of some fiscal importance.

95I.R.C. ? 103.96Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, 583-86 (1895).97 For an argumentpresentingthis view, see DEPARTMENTOFJUSTICE,TAXATIONOFGOV-

ERNMENTONDHOLDERSNDEMPLOYEES1938).

19771 291




F. Limitations on Expenditures

The Constitution contains few limitations onexpenditures

assuch. Moreover, he limitations on spendingthat do exist are onlyinfrequentlyconstruedby the courts,since restrictionsonthe stand-

ing of citizens to challengethe constitutionalityof spendingstat-

utes, thoughrelaxedin recentyears, continue to deter litigation.98Congress s empowered o raiserevenues"topaythe Debts and

provideforthe common Defense and generalWelfareof the UnitedStates."99This provisiondoes not, however,impose any effectivelimit on the scope of the federalspending power.In construing he

SpendingClausethe SupremeCourthas declared that Congress snot limited in spendingby the other enumeratedpowersof ArticleI but may spend forthe "generalwelfare."'10 ndthe "generalwel-fare" criterionis not itself a limitation on the congressionalpowerto spend, as the Courtmade plain in the course of upholdingthe

public financingof presidential campaignsestablishedby the 1974amendments to the Federal Election CampaignAct.'"'Neverthe-

less, the Bill of Rights,and in particular he firstamendmentprovi-sion

prohibiting Congressrom

passinglaws

"respectingan Estab-

lishment of Religion," place a limit on particular types of federal

expenditures. 2

Whetherthe federalgovernment'spowerto spend is limited in

any way by more general considerationsof federalismis an openquestion. In the 1936 decision in United States v. Butler,'03he

SupremeCourt declared a federaltax-and-expenditure cheme un-constitutionalon the ground hat the expenditureportion,authoriz-

ingpaymentsto farmerswhoagreedto acreagerestrictions, nvaded

the powers reserved to the states by the tenth amendment. TheCourtcharacterized he spending provisionsas "a scheme forpur-chasing with federal funds submission to federal regulationof a

subject reservedto the states."'04Yet one year later the Courtse-

verely limited Butler, holding that Congresscould impose on em-

ployersa federal tax reducibleby creditsfor contributions o state

unemploymentfunds conforming o federally prescribedcriteria.105

98

CompareFlast v. Cohen,392 U.S. 83 (1968),with UnitedStates v. Richardson,418U.S. 166(1974),and Massachusettsv. Mellon,262U.S. 447 (1923)." U.S. CONST. rt. I, ? 8, cl. 1.00 UnitedStates v. Butler,297U.S. 1, 66 (1936)(dictum).'0'Buckleyv. Valeo,424U.S. 1, 90-91(1976).102See Flast v. Cohen, 392 U.S. 83 (1968).03297 U.S. 1 (1936).04 UnitedStates v. Butler,297U.S. 1, 72 (1936); ee alsoUnitedStatesv. GerlachLive

StockCo., 339U.S. 725,738(1950).105StewardMachineCo. v. Davis,301U.S. 548 (1937).

292 [44:271



AmericanFiscal Constitution

The Court'sruling implied that Congresscould impose restrictionson a state's right to receive federal grants-in-aidwithout violatingthe tenth amendment.'06The use of both of these techniques hasbecome common.'07

Nonetheless, the decision in Butler has never been overruled,and the Supreme Courtwould probablyrecognizean implied limi-tation on the federal spending power if that power was used toencroachon essential governmentalfunctions of the states. Such alimitation might be either implied fromthe constitutional choice ofa federal system (much in the way that intergovernmental ax im-

munities were derived) or found in the tenth amendment. Thatamendment, it will be recalled,providesthat "powersnot delegatedto the United States norprohibitedby it to the States, are reservedto the States respectively, or to the People." Although in the pasttreated by the SupremeCourtas a truism-namely, that powersnot

delegated are necessarilyreserved'08-thetenth amendment has re-

cently experienced at least a partial reinvigoration.In National

League of Cities v. Usery,'?9 closely divided Courtstruck down afederal statute imposing minimum wage and hour regulations onstate and local governments,ruling that this exercise of the com-merce power violated state sovereignty. The Court specifically re-servedthe questionwhetherCongressmight constitutionally"affect

integral operations of state governments by exercising authoritygranted it under other sections of the Constitution such as the

Spending Power . . . .""o This language should probablybe readin conjunctionwith the dissenters'referenceto the possibility that

"Congressmay neverthelessaccomplishits objectives ... by condi-

tioning grants of federal funds upon compliancewith federal mini-mum wage and overtime standards . . . ."1 If National League ofCities is interpreted as establishing a balancing test weighing therelative importanceof the federal interestagainstthe strengthof the

"0Mhe Court held that Congresscould induce state legislaturesto participatein the

unemploymentinsurance scheme by offeringlocal employersa credit against the federal

employmenttax. The tax creditfell shortof the type of "undue nfluence"or"coercion" f astate that wouldviolate the tenth amendment.Id. at 585-93.The Court ater extended the

noncoercionrationale to sustain the use of conditionalgrants-in-aid.Oklahomav. UnitedStates Civil ServiceComm'n,330 U.S. 127, 142-44(1947).107 orexample,the systemof unemployment nsurancesustainedin StewardMachine

Co. v. Davis, 301 U.S. 548 (1937),is essentially equivalentto the one in use today. See textat note 160infra.

08 United States v. Darby,312U.S. 100, 124(1941).See also note 11supra.o09 26 U.S. 833 (1976)."10 d. at 852 n.17.

"' Id. at 880 (Brennan,J., dissenting).

19771 293




state's interest in autonomy,"2 hen in extreme cases the balance

may swingagainstfederalgrants-in-aid hat imposeconditionssub-

vertingthe independenceof state legislatures.The constitutionallypermissiblescopeof state andlocalspend-

ing has not been widely litigated or discussed. The issue is notaddressedin the Constitution. But generalprinciplesderivedfromcases involvingstate regulationsuggestthat limits do exist. Statescould not, for example, create a barrier to interstate commerce

throughuse of the spending power. Similarly, if Congress, actingwithin its constitutional powers, enacted a spending programto

achieve a particularobjective,a state spending program hat frus-trated the achievement of that objective might be held invalidunder the Supremacy Clause."3The fact that a subject may be

primafacie national in characterdoesnot, however,oust the states.States provide for the common defense by maintaining militias,although today those militias form the National Guard and arefinanced largely by the federal government. Similarly, although"[n]o state may enter into any Treaty" and foreignaffairs is ob-

viously a national concern,many states maintainrepresentationaloffices in foreigncountries for the purposeof stimulating demand

for their exportsand attracting foreigncapital.

II. THE GERMAN ISCALCONSTITUTION: CONTRASTINGPPROACH

One can gain a firmergraspof the distinctive characterof theAmericanFiscal Constitutionby lookingat the fiscal constitutionof the FederalRepublic of Germany.The contrast is particularlydramaticbetween the formalfiscal provisionsof the U.S. Constitu-

tion and those of the Basic Law (Grundgesetz)of the Federal Re-public. The provisionsof the Basic Law governingthe fiscal rela-tions betweenthe Federationand the Landeraredrawntogetherina single chapter,'4giving fiscal federalism n the FederalRepublica constitutionalexplicitnessand structurealmosttotally lackinginthe United States. The greaterdetail of the Basic Lawis explainedin part by the time of its adoption.In 1949the taxingopportunities

12 See id. at 856 (Blackmun, J., concurring); Note, The Clean Air Act Amendments of1970:A Threat to Federalism? 76 COLUM. . REV.990 (1976).

"3 U.S. CONST. rt. VI, cl. 2; cf. Townsend v. Swank, 404 U.S. 282 (1971) (ruling thatstate implementing legislation inconsistent with the federal Social Security Act violates the

Supremacy Clause)."4 GG arts. 104a-115 (Chapter X). This chapter governs not merely fiscal but also

budget, audit, and credit matters. Two important fiscal provisions not in Chapter X are arts.91a and 91b (Chapter VIlla) on the "joint tasks" (Gemeinschaftsaufgaben) of the Federation

and the Ldnder. See note 128 infra.

294 [44:271




and spending responsibilities of the modern state were far greaterthan they had been in 1787, when the customs were by far the

principalsourceof revenue.ExperienceunderpriorGerman consti-tutions may also have contributedto the greater specificity of theGermanfiscal constitution.

The specificity of the Basic Law, if not a mistake, has certainlyhad its costs. The revenue sharingprovisionshave at times servedas an impediment to the type of financial equilibriumbetween theFederation and the Landerthat the governmentsof both have de-sired. As a consequence,the fiscal provisionsof the Basic Law were

amended in 1955, 1957, 1967, and 1969. The last of these amend-ments compoundedthe level of detail, althoughit also increased the

flexibility of the provisionsgoverningfederal fiscal legislation andFederation-Landercooporation."5

The fiscal provisionsof the Basic Law carefullydivide the tax-

ing competences of the Federation and the Lander. The Federationalone benefits from customs duties and from a long list of miscella-neous taxes."6 The Ldnder in turn have the exclusive benefit of

property, estate, and certain other taxes.17Receipts from three ofthe most important taxes-personal and corporate income taxesand the value-added tax-are sharedamongthe Federationand theLander."1Thus, in contrastto generalrevenuesharing n the UnitedStates, which is merelya federalspending program,19 evenueshar-

ing in West Germanyis a true division of revenues from constitu-

tionally designated taxes. In keeping with the German tradition ofadministration of federal laws by the Lander, these three shared

taxes, which generate about two-thirds of all revenues,'20 re col-

lected by the revenue authoritiesof the Ldnder. 2The Basic Law prescribesthat the Federationand the Lander

share the receipts from personal and corporate income taxes

equally.'22The sharingratio forthe value-addedtax, which is muchmore significant in West Germany than is the sales tax in the

"1 A brief survey of the background of the constitutional changes between 1949 and 1969is provided by N. JOHNSON,GOVERNMENTN THEFEDERALEPUBLICFGERMANY20-31 (1973).

"s GG art. 106(1).

17 GG art. 106(2). Municipalities (Gemeinden) benefit from real property and certainother taxes, as well as from a share of the income tax. GG arts. 106(5),(6).

"s GG art. 106(3)."9 See text at notes 176-80 infra.20F. STRAUSS, IE FINANZVERFASSUNG1-82 (1969). Although not an official government

document, this book was written while Strauss was Minister of Finance. The two-thirdsestimate excludes tax collections by municipalities.

121 GG art. 108.122 GG art. 106(3).

1977] 295




United States,'23s establishedby legislation.Suchlegislationmustreceive the assent of the Bundesrat, an upper house composedofrepresentativesof the Lander, and must also complywith specificconstitutional principles designed to achieve what is popularlycalled "verticalequity."'24

Even morestriking o anAmericanobserver hanthe provisionsof the Basic Lawproviding or the sharingof revenues betweentheFederationand the Landerare the provisionsdesignedto redistri-bute tax receiptsamongtheLander. The Basic Lawpromotesredis-tribution among the Lander in two ways: vertically, throughthe

mechanismfor revenuesharing,and horizontally,throughthe useof equalizationpayments amongthe Lander.One of the constitutional principles governingthe sharingof

value-added tax receiptsbetween the Federationand the Lander sthat uniformityof living standardsis to be "ensured" hroughoutthe country.'25 o achieve this goal, at least three-quartersof theLander share of value-added tax receipts is distributed on a percapita basis, unlike personal and corporate ncome tax receiptswhich are returnedto the Lander from which such taxes are col-lected.'26Thus, the greaterthe share of value-addedtax receiptsgoingto the Lander relative to the Federation,the greaterthe im-pact revenuesharingwill have in offsettingdifferencesamongtheLanderin taxing capacity. In addition, the Basic Law authorizesfederal legislation allocating up to 25%of the value-addedtax re-ceipts to Landerwhose per capita revenuesfromLand taxes fallbelow the averageof all Ldnder.'2 There are also otherprovisionsthat enable the Federationto make grantsof variouskinds to the

Landerout of federalrevenues.'28

123 The standard rate of value-addedtax in West Germany s 11%.See generallyINTERNATIONALUREAU FFISCAL OCUMENTATION,HETAXATIONFCOMPANIESN EUROPEparas. 309-335, at 105-12. In 1976 the Lander received 31% of value added-tax revenues.BUNDESMINISTERIUMERFINANZEN,INANZBERICHT976, at 131 (1976).

24 GG art. 106(3).125 GG art. 107. The principle of uniform living standards is part of an interrelated group

of principles providing for the coordination of the revenue requirements of the Federation andthe Lander through multiyear planning so that "a fair balance is struck, any overburdeningof taxpayers precluded, and

uniformityof

livingstandards in the federal

territory ensured."GG art. 106(3)(2).l2' GG art. 107(1); Gesetz iiber den Finanzausgleich zwischen Bund und Landern, ? 2(1),

[19691BGB1 [Bundesgesetzblatt] I 1432.

'1 GG art. 107(1);Gesetziiber den Finanzausgleich wischenBund und Landern,??2(2), (3), [1969] BGB1 I1432.

12 The Basic Law requires federal financing of at least one-half of the expendituresincurred in "joint tasks" (Gemeinschaftsaufgaben) in higher education, regional develop-ment, agricultural development, and coastal preservation. GG art. 91a. The Federation is alsoempowered to grant financial assistance to the Lander for "important investments" meeting

296 [44:271



19771 American Fiscal Constitution 297

The second, and to the Americanobservereven moreremark-

able,means of

redistributingtax revenues is the

requirementthat

financially strong Lander make equalization payments directly to

financiallyweak Lander.29One of the explicit goalsof the Basic Lawis "reasonableequalization between financially strong and finan-cially weak Ldnder."130By statute, equalization payments must

bring the financially weak Landerto within 95% of a target figurewhich is roughlyequivalent to a national average.'3' As a result, in1975 four financially strongLandermade payments totalling aboutDM 1.9 billion (1.3%of all Landerexpenditures) to the remaining

five Lander.32Another major tenet of Germanfederalism is equalization oftax burdensthroughoutthe nation. Uniformfederallegislationgov-erns not only the taxes accruingto the Federation and sharedwiththe Lander, but also many of the taxes that accrue solely to theLander. Property and estate taxes are created and regulated byfederal legislation, though the Lander enjoy all of the proceeds.When the federal legislature acts with respect to these taxes, it

normallysets the same rates throughoutthecountry.'33

ndeed, one

broadlydefined criteria.GG art. 104(a)(4).See also GG art. 106(4),providingfor federal

compensation o Landerfor increasedburdensstemmingfromthe establishmentof federalfacilities within theirborders.

'12 GG art. 107(2). This article imposes a duty on the legislatureto pass legislationspecifying he conditionsunder whichequalizationpaymentsareto be madeand the criteriafordetermining he amounts.Suchlegislation may also provide orgrantsof federalfundsto

financiallyweakLiinder.130Id.'13 Gesetz iiberden Finanzausgleichzwischen Bund und Laindern, 10(3),[1969]BGB1

1 1432,1434.132 BUNDESMINISTERIUMER FINANZEN, FINANZBERICHT976, at 141 (1976). The paying

Lander were Nordrhein-Westfalen,Baden-Wiirttemberg,Hessen, and Hamburg;and the

recipientLander wereBayern, Niedersachsen, Rheinland-Pfalz,Schleswig-Holstein,Saar-

land, and Bremen. Id. Additionalsupplementary ederal allocationsof value-addedtax re-

ceipts to financiallyweakLander,see text at note 127supra,amountedto anotherDM 800million in 1975.Id.

133 See H. GRUMPEL,TAXATION N THE FEDERALREPUBLICOF GERMANY1/3.2 (2d ed. 1969)

(WorldTax Series). Under Article 105(2)the Federation has concurrent egislative powersovernot only all taxes that accruewhollyor in partto the Federationbut also over all taxes"where he conditionsprovided orin paragraph 2) of Art.72 apply."Since Article72(2) is

phrasedbroadly,the Federationmay legislateon substantiallyall taxes except local excisetaxes ("ortlichenVerbrauch-und-Aufwandsteuern").hese taxes are within the exclusive

jurisdictionof the Lander"as long and in so far as they are not identicalwith taxes imposedby federallegislation."GG art. 105(2a).AlthoughfederallegislativejurisdictionoverotherLand taxes is only concurrent,such federaltax legislationpreemptsLand legislation protanto. The result is that tax burdens are virtuallyuniformthroughoutthe country. One

exceptionis that federallegislationestablishingthe realproperty ax permitsmunicipalitiesto vary the rate within certain limits. INTERNATIONALUREAUOFFISCALDOCUMENTATION,HE

TAXATIONOF COMPANIESN EUROPEpara. 302, at 93 (1975).




of the criteriapermittingfederal egislationon taxes accruingsolelyto the Landeris the

necessityfor "the maintenanceof

legalor eco-

nomicunity, especiallythe maintenanceof uniformityof livingcon-ditionsbeyondthe territoryofanyoneLand. '34Thus the BasicLaw

goes far toward making equality of total tax burdens among theLanderinto a constitutionalprinciple.

III. FISCALFEDERALISM N PRACTICE

The American Constitution, unlike the West German Basic

Law, has few provisionsgoverning he fiscal relationsbetween thefederation and the states. As the review of the American FiscalConstitutionin Part I showed,relativelyfew constitutional limita-tions have been imposedon the taxes that may be levied by eitherlevel of governmentoron the purposes orwhich eithermay spend.Moreover,despite the SupremacyClause,there is no U.S. rulethata particular ederaltax-such as the incometax-preempts a simi-lar state tax. Nevertheless, the patternof taxing and spendinginthe United States reveals a set of workingassumptionsabout the

fiscal prerogativesand responsibilitiesof each level of government.The federalgovernmentand the states have specialized, with thefederal governmenttaxing different sourcesof income from thosetaxed by the states and spendingits funds on differentobjectives.Althoughthe basic allocationof fiscal authorityis remarkably ta-

ble, the area of overlapon the expenditureside has been growingas the federalgovernmenthas assumedincreasing inancialrespon-sibilty for such traditional state activities as education,highways,and welfare.

A. Taxation

As we have seen, the Constitutionreservescustoms duties tothe federalgovernment.But the customstoday provideonly about1%of total federalrevenues.The principalsourceof federalrevenueis the personaland corporate ncometax, with the personal ncometax accountingfor about 44%and the corporate ncome tax about14%of federalrevenues.By far the most rapidly growingsourceof

revenue is social insurance axes andcontributions,nowaccounting

'34 GGart. 72(2)(3).The othercriteria orfederal egislationarethat "a matter cannotbe effectivelyregulatedby the legislationof individualLander"orthat "the regulationof amatterby a Land awmightprejudicehe interestsofotherLander r ofthepeopleas a whole...." GG arts. 72(2)(1), 72(2)(2). When one or more of these criteriaare satisfied thefederation s givenauthority o regulate axesaccruing olelyto the Lander.GG art. 105(2);see note 133supra.

[44:27198




for over31%of federalreceipts.'35 ince these social insurance reve-nues flow into so-called trust

funds,which are earmarkedfor de-

fined expenditures, many Americans do not think of social insur-ance taxes as federal revenues but rather as a separate tax-and-

expenditure system. Indeed, it is conventional to distinguish be-tween generalrevenues and trust fund revenues, althoughfor pur-poses of macroeconomics,as opposed to bookkeeping,there is nosubstantial difference.

The revenuesof state and localgovernmentsarenearlyas largeas those of the federal government.If one excludes grants-in-aid,

state utility and liquorstore receipts, and trust fund receipts, com-bined state and local revenues are approachingfederal revenues($182billion and $225billion, respectively, in 1975).136

The largest sourceof state and local revenues has traditionallybeen the propertytax, which providessomewhatover 22%of stateand local generalrevenues.'37As previouslymentioned, this sourcehas been placed beyond the effective reach of the federal govern-ment by the ApportionmentClause.'38Most states have ceded the

propertytax to local governments,althoughstate courtcases rulingthat it violates the Equal Protection Clauseor the equivalentstateconstitutional provisionto use local propertytaxes as the principalmeans of financing local education may lead some states to adoptstatewide propertytax systems to finance education.'39

The second largest sourceof state and local revenues(12.87%),and one growingat a faster rate than property ax revenues,is salesand grossreceipts taxes. There is little overlapbetweenfederal andstate taxation in this categorybecause, although both federal and

state governments mpose taxes on sales, the federal"excise" tax islimited to sales by manufacturerson a limited numberof products

'15The statistics in this paragraphare taken from actual revenues for fiscal 1976,re-

ported in 1978 BUDGET,upra note 37, at 56-57.136TRENDS, upra note 20, at 29 (Table XI). 1975 grants-in-aid were $48 billion and

federal rust fundrevenueswere$80billion;stateutility, liquorstore,and trust fundrevenues

amountedto $33 billion. Id. at 29, 35 (Tables XI, XIV). Borrowings excluded fromboth

federaland state figures.37 REVENUEANDDEBT, supra note 83, at 30 (Table 16).

13' See text at note 81 supra.139 See, e.g., Serranov. Priest,5 Cal.3d584,487P.2d 1241(1971)(Serrano ); Serranov.

Priest,557 P.2d 929(Cal. 1977)(Serrano I);Millikenv. Green,389 Mich. 1, 203N.W.2d457

(1972);Robinsonv. Cahill,118 N.J. Super.223,287A.2d 187(1972),aff'don othergrounds,62 N.J. 473,303A.2d273(1973).But cf. SanAntonioIndependentSchoolDist. v. Rodriguez,411 U.S. 1 (1973)(supplementing tate financingof publiceducation with local ad valorem

property ax doesnot deprive amiliesresiding n districtswithlowproperty ax baseof equal

protection).Certainlydecisions ikeSerrano will lead somestatesto increase he use ofother

revenuesourcesto financeeducation.

1977] 299




while state and local sales taxes apply to virtuallyall final sales toconsumers.Althoughan increasingnumberof cities have imposedsales taxes, the greatbulk of sales tax revenuegoesto state govern-ments. Thus, within the states, competitionfor revenues s reduced

by the traditionthat local governmentsdepend primarilyon prop-erty taxes while state governmentsdepend heavily on sales taxes.Imbalances tend to be handled by intergovernmental transferswithin eachstate orby arrangementswithina state forlocalgovern-ments to receive a portionof state collections within theirbounda-ries.

Personal and corporateincome taxes (12.37%)are nearly asimportantas sales taxes, andaregrowingat a faster ratethan either

propertyor sales taxes.'40Forty-onestates have a personalincome

tax,'4'and the numberof municipal ncometax systemsis growing.Competition ortax revenuesbetweenthe states and thefederal

government s largelyconfinedto the income tax, but the serious-ness of this competitionhas been limited by the provisionof theInternalRevenueCodepermittingstate incometax paymentsto bededucted from taxable income for federal personaland corporate

income tax purposes.'42This deductionmakesit easierfor states andmunicipalitiesto increase income tax rates. Part of each dollarofincreasedstate taxation is in effect paid by foregonefederalreve-

nues; the percentagethus picked up by the federal governmentdependsupon the marginalfederaltax rate of the state taxpayers.Similar indirect assistance is affordedby the federal income taxdeductionforstate gasolineand property axes.'43Revenueforegoneby the federalgovernmentbecauseofthe deductibilityofstate taxes

is estimated to total about $13.5 billion in fiscal 1978,an amountequal to morethan 6%of total federal incometax receipts.'4

B. Expenditures

The federal governmentand the states specialize in expendi-turesas well as in taxes, but to a much lesserdegree.Just overone-

'" Statistics on state and local tax revenues in this and preceding paragraphs are takenfrom REVENUENDDEBT, upra note 83, at 30 (Table 16).

141 2 ADVISORY OMM'NONINTERGOVERNMENTALELATIONS,IGNIFICANTEATURESOFFISCAL

FEDERALISM9 (Table 66)(1976-77 ed.). Three additional states tax some forms of income,such as dividends, interest, or capital gains. New Jersey is the only state to introduce anincome tax since 1971, and such populous states as Florida and Texas do not have anypersonal income tax. Forty-five states have a corporate income tax. Id.

142 I.R.C. ? 164(a)(3).14 I.R.C. ?? 164(a)(2), 164(a)(5).144

Receipts forgone are tabulated in SPECIALNALYSES978, supra note 7, at 269-70(1977). For federal income tax receipts, see 1978 BUDGET,upra note 37, at 57.

300 [44:271




quarterof the national budget goes fornational defense and foreignaid, categories in which state spending is minimal. Another one-tenth of the federal budget pays interest on the national debt. Re-tirement annuities under the Social Securitysystem, whichhavenodirect counterpartin the states, representanotherone-fifth of thefederal budget. The bulk of the remaining one-third or so of the

budget is devotedto functions where both federal and state govern-ments are active. In some of these areas, however,the federalrole

may consist of makinggrantsto the states, a subject to be discussed

separatelybelow.'45

Historically, the most important categoriesof state and localexpenditure have been education and highways. Grade and highschools are operated by local governments-usually single purpose"schooldistricts"-but the moneyis providedby both local taxationand aid providedby the states. In 1975,state and localgovernmentsspent $69.8billionon education,while the federalgovernmentspent$13.1billion, principallyin transfers o states and localities.'46 hus,the financing, as well as the provision, of education remains pre-dominantly a state and local affair. Highwaysare also primarilya

state and local matter, with the states and localities responsiblein1973 for $18.6 billion out of a total of $19.2 billion expended on

highways by all levels of government.147ncluded within the stateand local spending total, however, is the contributionof a federal

highwaytrust fund earmarked orthe constructionof the interstate

highwaysystem. This fund, financedin largepartby a federalgaso-line tax, has contributed about $6 billion per yearto state and local

spending in recent years.'48

The greatest interplay between federaland state expendituresis found in the welfaresphere. Welfarehas also become the centerof intense political debate about the respectiveroles of the federaland state governments.Both federal and state welfareexpenditureshave grownrapidly duringthe last decade. Using a narrowdefini-

tion,'49ederal welfareexpendituresgrewfrom$5.2billion (less than

'" Federalexpendituresare listed by functionin 1978BUDGET,upranote 37, at 52.4"TRENDS,upranote 20, at 25 (Table IX). State and local expenditure otals do not

includeexpenditures inancedby federalgrants-in-aid,but do includeexpendituresinancedby federalgeneralrevenuesharing.

'4 J. MAXWELL J. ARANSEN,INANCINGTATEANDLOCAL OVERNMENTS60-61 (TablesA-4, A-5)(3ded. 1977).

18 SPECIALANALYSES1978,supra note 7, at 38 (Table B-8).4" The narrowdefinition is the budget categoryentitled "publicassistance and other

incomesupplements."The largestprograms ncludedare Aid to Families with DependentChildren,FoodStamps, and SupplementalSecurityIncome.See note 150infra.

1977] 301




3%of total expenditures) n fiscal 1970 o an estimated$26.2billion(more than 6% of total expenditures) in fiscal 1977. Taking abroadermeasurethat includes Social Securityretirementand disa-bility payments, "incomesecurity" expendituresgrewfrom $43.8billion (22%of total expenditures)in fiscal 1970 to an estimated$116.0 billion (28%) in fiscal 1977.150

The federalgovernmentbearsthe bulk of welfareexpenditures(eventakingthe narrowermeasure).Although ederalizationof wel-fare has longbeen a rallyingcryof manysocialreformers,hat goalhas in large measure already been reachedthroughinnumerable

incremental decisions. In 1960 the federal government paid only44%of the total welfarebill, but by 1970 he federalpercentagehadreached 71%, and by 1975, 77%.'5'

The principalwelfareprogramsnvolveinterestingexamplesoffederal-state cooperation. The Aid to Families with DependentChildrenprogram AFDC),is administeredby state and local gov-ernments,but financed in part by the federalgovernment.52t pro-vides cash payments to some 5.6 million motherswith dependentchildren.153The states determine the level of payments, and the

federal governmentpartially reimbursesthe states accordingto acomplex formula.The level of payments consequentlyvaries fromstate to state, depending upon how much each state is willing to

spend. MaximumAFDCpaymentsfora family of fourrangefrom$60 in Mississippito $433in Oregonand $514in Hawaii.'54

'50Fiscal 1977 figures are from OFFICE FMANAGEMENTNDBUDGET,ISCAL978 BUDGETREVISIONS9-60 (1977)[hereinafter cited as 1978 BUDGET EVISIONS].These figures reflectCarter Administration adjustments to Ford Administration estimates.) Fiscal 1970figures are

from OFFICEFMANAGEMENTNDBUDGET,UDGET FTHEUNITEDTATES OVERNMENT,ISCALYEAR1972, at 81, 158 (1971). Because of changing budgetary categories the figures forthe two

years may not be precisely comparable. Even the broad definition does not include unemploy-ment insurance benefits, which grew from $3.4 billion in fiscal 1970 to an estimated $15.9billion in fiscal 1977. 1978 BUDGETEVISIONS, upra, at 59-60. Nor does it include paymentsto veterans, public employee retirement payments, and similar programs that keep millionsof the aged and disabled off welfare.

'15TRENDS, supra note 20, at 27 (Table X). If state welfare expenditures financed byfederal general revenue sharing grants were counted in the federal column, the federal sharewould be about 79% for 1975. See id. at 27 n.3. This calculation is based on an estimate of1974 general revenue sharing grants.

152 42 U.S.C. ?? 601-610 (1970).'5 SPECIALNALYSES 978, supra note 7, at 236 (Table L-7). A few states have AFDC-UF

programs for families with unemployed fathers.154 NATIONAL CENTER FOR SOCIAL STATISTICS, DEPT. OF HEALTH, EDUCATION AND WELFARE,

AIDTOFAMILIESWITHEPENDENTCHILDREN 0 (Table 4)(February 1977). See generally STAFF

OF SUBCOMM. ON FISCAL POLICY OF THE JOINT ECONOMIC COMM., 93D CONG., 2D SESS., HANDBOOK

ON PUBLIC NCOME RANSFER ROGRAMS:975, at 140-70 (Comm. Print 1974) (Studies in PublicWelfare Paper No. 20).

302 [44:271




Quite different federal-state relationships are found in otherwelfareprograms.In the Food Stamp program,the federalgovern-ment providesthe funds, and the states administer the program.'55The rapid growthof this program, rom$0.6 billion in fiscal 1970 toan estimated $5.5 billion in fiscal 1977, accounts for a substantial

portionof the increase in federalwelfarefinancing.156Equally important in the movement toward federal financing

of welfare is the Supplemental Security Income program(SSI),'57passed in 1974.This programshifted responsibilityforthe fundingand administrationof public assistance programsfor the aged, the

blind, and the disabled to the federal government. As part of alegislative compromisethe states werepermittedto supplementthefederal payments. Because of these supplemental state paymentsonly 73%of total SSI payments were funded by the federalgovern-ment in 1975.158

Still anotherrelationshipis found in the unemploymentinsur-ance system,'59which is not usually classifiedas welfare because itsbenefits are available to an eligible unemployedpersoneven if hecan support himself from investment income or from the earningsof his spouse. The key to the programis a federal unemploymenttax levied on employersat the rate of 3.2%of payrolls. If the statemaintains an unemploymentinsuranceprogramconforming o con-ditions established in the federal statute (and all states do so), the

employercan credit the state unemploymenttax againstthe federaltax. Indeed, the federal statute permits the states to tax employerson an experiencerating basis, so that the better the recordof the

employer in providing stable employment, the lower his tax; to

achieve this objectiveandto providean incentiveforstable employ-ment, the employer s permittedto creditthe maximum rateof statetax (up to 2.7%)whether it is actually paid or forgivenunder thestate experience rating formula.6?0tate unemploymenttax collec-tions aredepositedin individualunemploymenttrust fund accounts

155 U.S.C. ?? 2011-20251970).1' Fiscal 1977 figures are from 1978 BUDGET REVISIONS,supra note 150, at 59 (1977)

(includingCarterAdministration djustments o FordAdminitration stimates).Fiscal 1970

figures are from SPECIALNALYSES,supranote 7, at 192 (Table L-9) (1971).15742 U.S.C. ?? 1381-1385Supp. IV 1974).I5 For furtherdetails,see Hawkins,State SupplementationunderSSI, 1975,Soc. SECU-

RrrYBULL., Feb. 1977, at 12.

1t542 U.S.C. ?? 501-504(1970);I.R.C. ?? 3301-3308.'IOBecauseof the demandson the trust fundsin the recentrecession, he net federal ax

has been increasedtemporarily rom0.5%(3.2% ess 2.7%) o 0.7% n orderto repayloansmadeto the trust fundout of generalrevenues.UnemploymentCompensationAmendmentsof 1976,Pub. L. No. 94-566,? 211,90 Stat. 2667.

1977] 303




in the U.S. Treasuryand may be withdrawnonly forthe paymentof benefits conforming o federalcriteria.The unemployedworkerreceivesindividualpaymentsfroma state office.

The amountof unemploymentbenefitsis withinthe discretionof the states, and varieswidelynot merelyin absoluteamount,butalso in the percentageof the unemployedworker's ormerwagesreplacedby benefits.Although he NixonAdministration wicepro-posed to the Congresslegislation providingfor federal minimumstandardsin orderto bring up paymentsin laggardstates,18' ppo-nents were able to defeat any attempt to achievewhat in this con-

text was pejorativelycalled the "federalization" f the unemploy-ment insurancesystem. Ontop of this federal-statestructure,Con-

gress has during periods of high unemployment provided for"extendedbenefits"that continuepaymentsto unemployedwork-ers beyond the 26 weeks involved in the regularprogramup to atotal of 65 weeks.Extendedbenefits arefinancedout of the federal

unemploymenttax and generalfederalrevenuesratherthan out ofstate trust funds.'62

C. IntergovernmentalTransfers

The American Constitution contains nothing resemblingthe

provisions in the GermanBasic Law that provide for sharing ofrevenues between the federationand the Liander nd forequaliza-tion paymentsamongthe Lander.Nevertheless,transferpaymentsfrom the U.S. federalgovernmentto state and local governmentshave becomea major eature of the informalAmerican iscal consti-tution. Althoughthese paymentsare only partiallydesignedto re-

dress the balance of fiscal powerbetween the federalgovernmentand the states, and are not ostensiblyintended to redistributereve-nues among the states, it is clear that federal transferpaymentscouldat least potentiallyhave a substantialimpacton the distribu-tion of revenues.

1. Grants-in-Aid.Beginningin the mid-1960's,grants-in-aidbecame one of the principaltools for federalattempts to copewitha wide range of domestic problems.Althoughmany grants-in-aidare related to welfare

programs,ransfersfromthe federal

govern-ment to the states far transcend the welfarearea. Federalgrants-in-aid are used acrossvirtually the entire gamut of state activity,

"' PUBLIC APERS FTHEPRESIDENT96, 498 (1969); id. at 281, 282 (1973).12 On the unemployment insurance system, see generally SUBCOMM.ON FISCALPOLICYF

THE OINTECONOMICOMM.,HANDBOOKNPUBLICNCOMERANSFERROGRAMS:975, at 50-84 (Comm. Print 1974) (Studies in Public Welfare Paper No. 20).

304 [44:271




from environmental protection to education to law enforcement.

They finance, at least in part, such diverse state activities as high-way beautification, disaster relief, preservationof historic proper-ties, health services, and school lunches.163

The increasinglybroad use of grants-in-aidhas broughtabouta rapid growthin federal transfersto state and local governments.Grants-in-aid grew from $2.9 billion in 1954 (0.8%of GNP and14.6%of the federal budget) to $10.4 billion in 1964 (1.6%of GNPand 19.5%of the federalbudget) to $43billion in 1974(3.1%of GNPand 22.3%of the federal budget).'4 In calendar 1975 alone grants-

in-aid grewby about 25% o over$54billion165nd are estimated atover $70 billion for fiscal 1977.166

The total volume of grants-in-aidto states is not planned on

any overall basis such as state need. It is simply the sum of a largenumberof individual federal decisions. Moreover,grants-in-aidarenot usually thought of as relieving the states of a burden;on the

contrary,state entitlement to federalgrantsoftenrequiresa match-

ing state payment for the program n question.The surplusor defi-

cit of the states as a whole does not appear, at least on casualanalysis, to be correlatedwith fluctuationsin the volume of federal

grants-in-aid. Rather the states appear to have consolidated sur-pluses in boomyears and deficits in recessionyears,as tax revenuesfall but the momentumof spending continues.

Similarly, little attention is paid to the distributionof the totalflow of federalgrants-in-aidamongthe states. Agricultural tates dowell in the agriculturalsector, and urban states do well in the wel-fare sector, but the overall effect on the state tax burden and state

budgetsappearsto be the outcome of a seriesofunrelateddecisions.Grants-in-aidneverthelessplay a limited redistributiverole,as

the regressionresultssummarized n TablesI andIIshow.The lowerthe per capita income of a state, the higher the per capita grants-in-aid. The same relationshipholds betweenper capita federalper-sonal tax receiptswithin a state and per capita grants-in-aid.Thesemeasures of redistributiondo not tell the whole story, however,asthe recent flurryof attention over the allegedtendencyofthe federal

63 SPECIALNALYSES978,supra note 7, at 282-87(Table 0-9).164 ADVISORYCOMMISSION NINTERGOVERNMENTALELATIONS, RENDSINFISCALFEDERALISM

1954-74,at 15 (TableIV)(1975).165 ECONOMICEPORT FTHEPRESIDENT51 (TableB-68)(1976).1" SPECIALNALYSES,upra note 7, at 270 (Table0-1) (1977).The grants-in-aid figures

in this paragraph include general revenue sharing.

1977] 305



306 The Universityof ChicagoLaw Review [44:271

government o favor "sunbelt"states suggests.'67norder o test the

validity of the "sunbelt hypothesis"as applied to grants-in-aid168and to determinewhether otherregionaleffects might explain thevariability in grants-in-aid among states, the nation was dividedinto four regions (South, West, Northeast, and Midwest).'9 Theregressionresults in Tables I and II hold redistributioneffects con-stant while measuringregionaleffectsand, similarly,hold regionaleffects constantwhile measuringredistributioneffects.

TABLE I17

CombinedRedistributionandRegionalEffectsin the U.S. Grants-in-AidSystem, 1975

(basedonper capitaincome)

Northeast Midwest South West

Gain (loss) ($20.74) ($18.08) $31.12 ($ 7.84)from redistri-bution effect

Gain (loss) $23.47 ($19.27) ($21.82) $30.74from regionaleffect

Combinedgain $ 2.73 ($37.35) $ 9.30 $22.90(loss)

Sources:

Grants-in-aid:DEP'T OF TREASURY,FEDERALAID TOSTATES,FIS-CALYEAR 1976 AND TRANSITION QUARTER (1976); Personal

Income: STATISTICAL ABSTRACT OF THE UNITED STATES 401-02

(Tables 643-44) (1976) ; Population:Id. at 11 (Table 10).

'7 Fora strong tatementofthealleged endencyof federal pending o favor hesunbeltstates, see FederalSpending:TheNorth'sLoss Is theSunbelt'sGain,8 NAT'L. 878(1976).

"I Mostdiscussions fthe sunbelthypothesisare concernedwithoverall ederal pendingratherthan merelythe grants-in-aidportion.

"s The regionalboundaries hosenwerethe same as those used in the NationalJournal

study of overallfederalspending.See FederalSpending, supranote 167.The Northeastincludedthe New Englandstates plusNew York,NewJersey,andPennsylvania.The Mid-west included he GreatLakesstatesplusMinnesota, owa,Missouri,Kansas,Nebraska, ndthe Dakotas.The SouthincludedDelaware,Maryland,WestVirginia,Kentucky,Arkansas,Oklahoma,Texas,andstatessouthandeast thereof.TheWest ncludedMontana,Wyoming,Colorado,NewMexico,andstates west thereof.Alaska, he statewith the highestpercapitaincomein the nation,was excludedfromthese regressions ecauseits extremelyhighlevelof grantsproved o affect overallresultsdisproportionately.

,70 These results wereobtainedby estimatinga regression f the form:



The University of Chicago Law ReviewERRATA

Volume 44, Number 2

Please insert after page 306.

Page 307. Footnote 170, line 2. Replace the equation with the following:

G - a +/ Yi + 2 X1 + X 2i + 34 X 3 i +


G--a+flT.+ /3 Xl + (3X2.+ (34X3.+p..i 1Ti + 2X1 i+ 3X2i 84XX3 + i


T. =a+ Y + 3 X +.t1i 1I i 2 i i

Page 310. Footnote 175, line 10. Replace with the following:CONSTANT INCOME WEST R2

Page 310. Footnote 175, line 13. Replace with the following:

fp is significant at the .90 level.




Gain (los

TABLE III71

CombinedRedistributionand RegionalEffectsin the U.S. Grant-in-aidSystem, 1975

(based onper capita personal tax collections)

Northeast Midwest South

s) ($38.95) ($38.16) $43.27from redistri-bution effect

Gain (loss)from regionaleffect

Combined gain(loss)

West

$ 9.68

$22.66 ($19.34) ($18.30) $26.74

($16.29) ($57.50) $24.97 $36.42

Sources:

Grants-in-aid and Population: see Table I; Taxation: STATISTICALAPPENDIX TO ANNUAL REPORT OF THE SECRETARYOF THE STATE

OF THE FINANCES FOR THE FISCAL YEAR ENDED JUNE 30, 1975,

at 54 (Table II) (1976).

Gi = a + iYi+ f2 Xli+ 3X2i+ fTyX3i+ Pi

where

G i = per capita grants-in-aid in the i th state.

Y i per capita income in the i th state.

X li = Northeast dummy variable (X li = 1 if the i th state is in the North-

east, --- 0 otherwise).

X 2i= South dummy variable.

X 3i = West dummy variable.

y i = Random error term.

CONSTANT INCOME NORTHEAST SOUTH WEST R 2

Coefficient 333.05 -.02052 42.74 -2.55 50.01 .29

(T-statistics) (6.12) (2.26) (2.37) (0.15) (2.98)

The F-statistic for the set of dummy variables is 5.27 (3, 44).

171 The estimated regression was of the form:

Gi = a + iTi + l2Xli+ 3X2i+ ByX3i+ Pi

1977] 307

I




The resultsshow that regionaleffects areroughlyas importantas redistribution ffectsin modifying he return lowofmoneyto the

states from what it would be if grants-in-aid simply transferredmoneyto the states in proportion o personalincome,or to federal

personaltax collectionswithin each state. The sunbelthypothesis,however,providesa simplistic and essentiallymisleadingexplana-tion of the regionaleffectsof the grants-in-aidprocess.

TableI assumesthat a neutralgrants-in-aidprogram,nvolvingneither redistributionnorregionaleffects,wouldreturn unds to thestates in direct proportion o personalincomewithin the state. In

order to give some dimension to the results, it should be borne inmind that for 1975,the yearstudied, average per capita grants-in-aid for the countryas a whole were about $238.172Because of theredistributioneffect, the Northeast and the Midwest, the two re-

gionswith the highestpersonal ncomes,receivedabout$21and$18per capita less than the national average,the West receivedabout$8 less, and the South, the regionwith the lowestper capitaincome,recieved about $31percapita more.Regionaleffects werenot, how-ever,consistent withthe sunbelthypothesis.Rather han the North-

east and the Midwesttendingto supportthe South and the West,the grant-in-aidprocess resulted in the South and the Midwest

tendingto supportthe Northeast and the West.The regionaleffectfavoring he Northeast more than offsetthe

unfavorableredistributioneffect there so that the Northeast, the

region with the highest per capita income, actually gained a netbenefit of about $3 per person.Onthe otherhand, forthe Midwest

where

G i, X , X 2i, X 3i, p are defined as in Table I.

T i - per capita personal federal tax receipts in the i th state.

(Sincepersonal ederal ax receiptsare notreportedeparatelyorMaryland nd the Districtof Columbia, he Marylandpercapitatax figurewasestimatedby multiplyinghe combinedareareceiptsby that fractionof the areapopulationresiding n Maryland,hendividingbythe Marylandpopulation.)

TAXCONSTANT RECEIPTS NORTHEAST SOUTI WEST R 2

Coefficient 261.49 .04647 42.00 1.04 46.08 .30

(T-statistic) (11.4) (2.45) (2.35) (0.06) (2.74)

The F-statistic for the set of dummy variables is 4.63 (3, 44).172 This figure represents he averageof state per capita receiptsand thereforemay

differslightlyfroma nationalaveragearrivedat by dividing otalgrants-in-aid y the totalU.S. population.Moregenerally, he resultsof the regressionreat each state as one unitrather han weighting tates by population.

308 [44:271




(the secondhighest incomeregion),the regionaleffect reinforced heredistribution effect so that the Midwest lost a total of about

$37per capita. The South, the regionwith the lowestper capita income,lost nearlyas muchby the regionaleffect as it gainedby the redistri-bution effect and enjoyeda net benefit of about $9 per capita. TheWest gainedmoreper capita than anyotherregionfromthe regionaleffect (about $31 per capita) and had a net gain of about $23 percapita.

Federalper capita personaltax collections are used in Table IIas an alternate measure of the redistribution effect to determine

whether federal tax revenues are redistributedthroughthe grants-in-aid process.The results of using this measure'73ifferfrom thosederivedfromusing per capita income principallyas a consequenceof two factors. The federal income tax is progressive,74 nd henceTable II shows a greaterredistributionfromthe richer(Northeast-ern and Midwestern)states to the poorer(Southern)states. A sec-ond and rather odd effect stems from the fact that the Westernstates pay somewhat less in federalpersonaltaxes than one would

predict fromtheir per capita income. By one methodof calculation,the states in the West pay about $104 less per capita than theywould pay if they wererandomly ocated amongthe regions,takinginto account the interactionof the West's higherper capita incomeand the progressivity of the federal personal income tax.175The

173Federalpersonal ax collections(includingboth the personal ncometax andemploy-ment taxes) were chosen ratherthan total federaltax collectionsbecause of concernaboutthe methodsusedto allocatecorporatencometax collectionsamong he states in thestatisti-cal compilations.Using personal axes also excludesfederalexcisetaxes, whicharereportedby the locationof manufacture.Kentucky, orexample,accounts ora disproportionatehareof total excise tax collections because of its key position in the manufactureof bourbon

whiskey,thoughthe incidenceof the tax is more ikelyto be borne n the consuming tates.174Employment axes, whichare includedin total personal ax collections,tend on the

otherhand to be proportional r even slightly regressivebecause the Social Securitytax islevied as a fixedpercentageof wages up to a maximumwagebase.

1'7 This result was obtainedby comparing he per capita personal ederal tax with the

per capita incomeof each state and the inclusionof a dummyvariable or states in the Westin the estimationof a regressionof the form:

Ti= -a + Yi= /2Xi-+ /i

where

T i = per capita personal federal tax in the i th state.

Y i per capita income in the i th state.

X i = West dummy variable (X i = 1 if i is a western state).

/~ = Random error term.

1977] 309




West,payingless than average n taxes, thereforegainsthrough heredistributioneffect

byabout

$10per capita.176The regionaleffect obtainedby using federaltax collectionsisslightly differentfrom the regionaleffect measuredby per capitaincome because of the differentmethodof calculatingthe redistri-bution effect, but the regionaleffect in Table II remainsroughlyofthe same magnitudeas in Table I. Again, the Northeast and theWestgainandthe Midwestandthe Southlose.Whenredistributionand regionaleffect are combinedunderthe personaltax methodofcalculation, the Northeast ends up a net loser by about $16 per

capita, the Midwest loses about $56 per capita, the South gainsabout $25per capita, and the Westgains about$36percapita. Theresultsunderthis methodof calculationtend to confirm he sunbelthypothesis,but they also showthat the West gains even morethanthe South, and that the Midwest,rather than the Northeast,is thebig loserfromthe combinedredistributionand regionaleffects.

Howevermuchweightmayattach to the preciseresultsof theseregressions,'77t is clear that the amountredistributedconstitutes

onlyaboutone-tenthof the total amounttransferred

hroughgrant-in-aidprograms,andthat the redistribution ffectis eitheroffsetorreinforcedby regionaleffects of somewhat the same magnitude.'78Even if redistribution romrichto poorcan be said to be an implicitfunctionof the grant-in-aidsystem, it is not of great significance nthe total intergovernmentaliscal system. Certainly n comparisonwith the West Germansystem, where constitutionallymandated

CONSTANT INCOME WEST R2

Coefficient -1102 .3676 -102.01 .68

(T-statistic) (5.26) (9.78) (1.59)

B 2 is significant at the .90 level.

17'Whythe Westpays less is by no meansclear.If, forexample,state tax collections

werehigherpercapitain the West,thenfederalpersonalncome ax collectionswouldbe lessbecauseof the deductibility orfederal ncometax purposesof certainstate taxes.But therearemanyotherpossibleexplanations.

"' Theserather impleregressionsreconcerned nlywiththe overalleffectofall grant-in-aidprograms ndobviously

donotdealwiththedetailsofthegrants-in-aidystem,whichis composed of a very large number of individual programs. See SPECIALNALYSES,upra note

7, at 280-87 Table0-9) (listingof grant-in-aidprograms).178 The redistribution nd regionaleffectscombinedexplainabout30%of the variance

in total grant-in-aid eceiptsof the states. The T-statisticsindicatethat the redistributioneffect is statisticallysignificant.They also indicatethat the regionaleffect is statisticallysignificantnsofaras theNorthwest ndWestgainandtheMidwestandSouth ose.However,it is not possibleto statewithconfidencewhether he NorthwestorWestis the largergainerorwhether he Midwestor Southis the larger oser.

310 [44:271




redistributionoperatesthroughrevenuesharingbetween the Feder-ation and the Ldnder and horizontal

equalization amongthe

Lander, the American fiscal system remains a federal system in

practice and not merely in constitutional theory.2. GeneralRevenueSharing.The introductionof generalreve-

nue sharingin 1972was an important development in intergovern-mental fiscal relations. The name is something of a misnomerbe-cause revenuesare not shared.The generalrevenuesharingprogramis simply an expenditureprogram n which federalgrantsare madeeach year to the states without the restrictions and conditions that

are the hallmark of conventionalgrants-in-aid.The 1972State andLocal Fiscal Assistance Act'79providedfor transfersaveraging ap-proximately $6 billion per year for five years (about 2% of federal

expenditures). This amount was increasedto just under $7 billion

per year in the 45-month extension enacted in 1976.180

Although general revenue sharingis often referred o as a "no

strings" program, a number of conditions are in fact imposed on

recipient state and local governments.Not only may they not dis-criminate on the basis of race, color, national

origin,sex, age, or

religionin the expenditureof the funds,'81 ut they are subject to anumber of other conditions as well. For example, only prevailingwage rates, which means union wagerates, may be paid on projectsfinancedwith generalrevenuesharingfunds.'82Until the 1976exten-

sion, generalrevenuesharingfunds couldbe used only for"priorityexpenditures," a term defined to exclude welfare and general ad-ministration.83But this requirementwas abolished'84when studiesshowed that, because of the fungibility of money, recipient govern-

mental units had virtually total discretionto spendrevenuesharingfunds as they liked, and could even use revenue sharingfunds todecrease local taxes.'85

9 31 U.S.C. ? 1221-1263Supp. II 1972).10 State and Local FinancialAssistance Amendmentof 1976,Pub. L. No. 94-488,90

Stat. 2341."1815 U.S.C. ? 1242(1970),as amendedby State andLocalFinancialAssistanceAmend-

ments of 1976,Pub. L. No. 94-488,? 8, 90 Stat. 2341.In United States v. City of Chicago,395 F. Supp. 329 (N.D. Ill. 1975),a federal udge enjoinedpaymentof revenuesharing unds

to the City of Chicagobecauseof discriminationn hiring n the policedepartment.Cf.Lauv. Nichols,414U.S. 563,569(1974)(sustaining?601of the CivilRightsActof 1964,42U.S.C.? 2000d(1970),whichforbidsdiscriminationby a program ractivityreceiving ederal inan-cial assistance).

s8231 U.S.C. ? 1243(a)(6)(Supp. II 1972).18331 U.S.C. ? 1222(Supp. II 1972).1B4 State and LocalFinancial Assistance Amendmentsof 1976,Pub. L. No. 94-488,? 3,

90 Stat. 2341.'8 See ADVISORYCOMMISSION NINTERGOVERNMENTALELATIONS,GENERALREVENUESHAR-

1977] 311




The allocation of revenue sharing funds among states and

among subsidiary governmentalunits within states was a majorissue in the designof generalrevenuesharing.Theresulting ormulareflects a seriesof political compromisesrather than any identifia-ble theory. Indeed, since the Senate and the Houseof Representa-tives were unable to agreeupon a formula,each state (taken as awhole including its subsidiaryunits) is allotted the greaterof twoamounts,namely, what it would receiveunder the Senate formulaor what it would receive under the House formula. This powertochoosethe more favorable ormula s aptly called the "best of both

worlds"approach.Underthe Senate formula allocationamongstates is made on

the basis of population, relative per capita income, and "tax ef-fort."'86 he Houseformula ncludes,in additionto these three fac-

tors, "urbanized"population and state income tax collections.'87The House formula is thus more favorableto urbanstates and tostates that rely moreheavily on income tax relativeto sales, prop-erty, and other taxes.

The practiceof makingfederalgrantsdirectlyto municipalitiesor other local governmentunits predated generalrevenuesharing.But the potential of this practice for fragmentingstate controloflocal governmentand forundermining he politicalpositionof state

governorshadpreviouslybeen maskedbecausegrants-in-aidargelysupplementedexisting state and local funding of specific ongoingprograms.Since generalrevenuesharingfunds were by definitionnot limited to any particularactivity and thereforecould be usedto fund new programs,the design of the sharingformulaexacer-

bated the underlying rivalryamong state governors,city mayors,and countyexecutives. This rivalrywas at least as largea factorinthe legislativeoutcome as that amongthe states.

Once a state allocation is determined,one-third of that sumgoesto the state governmentandtwo-thirdsdirectlyto localgovern-ments within the state. The allocationamonglocal governments scontrolledby a further formula. As a consequence,some 38,000differentgovernmentalunits receive revenuesharingchecks fromthe U.S. Treasury.The constitutionalprinciplethat the structure

ING:ANACIR RE-EVALUATION, 11 (1974); COMPTROLLERENERAL,REVENUEHARING:TSUSESBY ANDIMPACTON LOCALGOVERNMENTS0-58 (1974).

'" 31 U.S.C. ? 1225(b)(2)(Supp. II 1972).The "tax effort" actor for each state is afractionequal to total revenuefromstate and local taxes dividedby aggregatepersonalincomeof residents.31 U.S.C. ? 1228(c)(1)(A)Supp.II 1972).

's 31 U.S.C. ? 1225(b)(3) Supp.II 1972).

312 [44:271




of local governmentsis strictly a question for each state is under-

scoredby the wide differences n distributionpatternsfrom state tostate. Amongthe 38,000recipient local units are found a wide vari-

ety of local governmentforms-counties, municipalities,townships,native villages (in Alaska), and Indian tribes. Four-fifths of the

recipientunits have fewer than 2,500residents.The smallest recipi-ent is the CortinaRancheriaIndian Tribe in Californiawith a popu-lation of one.'88

The "best of both worlds"approachcreates incentives and ef-fects that are difficult to measure. One thing is clear however:gen-eralrevenuesharingprovidesno systematic equalizationof revenuesbetween poorerand richer states. Of the five factors found in theSenate and House formulas, only one-relative income-serves aredistributionalfunction. The urbanizationfactor,though arguablya measure of need, operates in the opposite direction because theurbanstates are by and largethe states with the highest per capitaincome.

Taking the programas a whole, however,generalrevenue shar-

ing does not have the potentially perverseredistributional effectsthat characterizeparticulargrant-in-aidprograms.In general, thestates with the lowest per capita incomereceivethe largestamountof revenue sharing payments per capita. For example, the pooreststate, Mississippi, has received the largest amount of sharedreve-nue per capita, 153%of national average per capita receipts. Simi-

larly, the state with the highest percapita income, Connecticut,hasreceived the fourth smallest amount of shared revenue per capita.On the other hand, the results reveal some remarkablediscrepan-cies. The second lowest per capita amount, for example, was re-ceived by Missouri, the median state in per capita income. Simi-

larly, Alabama, fourth from the pooreststate, has received almost

exactly the national averageamount in per capita payments.89'Whatever the results, it is clear that redistributionas such was

not a major goal of the Congress.Moreover,even if redistributionhad been the principal criterion, there are many ways to measureredistribution.The comparisonsabove,forexample,do not consider

what wouldhappenin the absenceof generalrevenuesharing(lowerfederal taxes, higher grants-in-aid, a lowerfederal deficit, etc.). In

'l8 FRIED, RIVLIN, SCHULTZE& TEETERS, SETTINGNATIONALPRIORITIES:THE 1974 BUDGET

280 (1973).189 These comparisons are based on R. NATHAN, . MANVEL& S. CALKINS,MONITORING

REVENUE SHARING 72 (Table 4-3) (1975); REISCHAUER, GENERALREVENUE SHARING: THE

PROGRAM'SNCENTIVES 4-45 (Table 2) (1976) (Brookings Institution Reprint No. 313.)

1977] 313




any event, so long as generalrevenuesharingremains such a small

percentageof state revenue-currently about 3%-any redistribu-tional effect will be minor.

Generalrevenuesharingat presentlevels could neverby itselfresult in "a reasonableequalizationbetweenfinanciallystrongand

financiallyweakstates,"as foreseenbyArticle107(2)of the GermanBasic Law.'9?The discrepancies in per capita personal income

amongthe states are simply too great.Per capita personalincomeis over60%higher n Connecticut han in Mississippi.Evenbetween

contiguousstates one findsremarkabledifferences;orexample,per

capita personalincome is morethan 40%higherin Illinois than inKentucky.9'I have chosenpercapitapersonal ncome as a measureof what equalizationwouldrequirebecause it is a measureof pro-pensity and ability to spend and to tax. But if one looksat actual

spending and taxing, one finds equally extraordinarydisparitiesamongthe states. Forexample,state and local governments n Del-awareandWyoming pendmorethan twice as muchpercapitathanin Arkansas.'92Moreover, astes forself-taxationvarywidely.Takethe case of Wyomingand Texas. Per capita incomewas about the

same in both in 1974. Yet it wouldhave requiredabout $2 billionper yearto bringTexasupto the Wyomingpercapitastate and local

expenditure level, nearly one-third of the entire general revenue

sharingbudget.'93Howeveronewantsto measureequality,the pres-ent generalrevenuesharingprogramwould have to be manytimes

largerto make significantheadwaytowardequalizationeven if thericherstates did not receivea penny.

With the 1976reenactment of generalrevenuesharing,its fu-

ture as a permanent eatureof American ederalismseemsassured.Hence, it deservesto be consideredas a featureof the Fiscal Consti-tution in the largersense. Although the general revenue sharingstatute does not create procedures or the resolutionof importantfiscal decisions as do the Budget and AccountingAct of 1921andthe CongressionalBudget and ImpoundmentControl Act of 1974,it will most likely become a fixed pole around which both federaland state budgetingwill take place. But there is no likelihoodthatgeneralrevenuesharingwilldisplacegrants-in-aid.Onthe contrary,

1'0See text and notes at notes 129-30 supra.' BUREAUOF THECENSUS,GOVERNMENTALINANCES N 1973-74, at 54 (Table26)(1975).

192 Id. at 48 (Table 22)."3 Wyoming per capita personal income was $4,695 in 1974, slightly largerthan the Texas

figureof $4,571.Wyoming pends$478per capita, Texas$313.The $2 billiondifferentialresults rom he factthatTexashas a much argerpopulationhanWyoming.Texashasmorethan 12 million residents, Wyoming 360,000. Id. at 48, 54 (Tables 22, 26).

314 [44:271




grants-in-aidare increasingat a much morerapidrate than generalrevenue sharing. In fiscal 1978generalrevenue sharingwill be at a

level only about 10%higher than in 1973,194ut duringthat sameperiod grants-in-aidwill have grown by about 65%.195

3. Categoricaland Block Grants. The greatest controversy nthe intergovernmentaltransfer field is the debate over categoricalversus block grants.Most grants-in-aidarecategorical n character.This means that any program's unds may be used by the recipientstate or local government only for a single narrowpurpose.In addi-

tion, categoricalgrants normallyhaveelaborate conditions attached

regulating the precise circumstances in which the funds may bespent. Many categoricalgrants also require recipient governmentsto match the federalfunds out of their ownrevenues.Duringthe late1960s hundreds of such categorical grant programswere enacted.Today state and local governmentsreceive assistance through928

categorical grant programsadministeredby 55 federal agencies,'96and the number of such programswill probablycontinue to grow.

A block grant, in contrast, consolidates a number of related

specific-purposegrants into a single grantwith a moregeneral pur-

pose. Within the scopeof a blockgrant, state and local governmentsare normallyfree to spend the money as they please. Exactly how

many block grant programshave thus far been enacted depends onwho does the counting. The AdvisoryCommissionon Intergovern-mental Relations has identified five such programs orthe purposesof its analytical work,'97ut their list includes the grantsof the LawEnforcement Assistance Administration (LEAA), a Johnson Ad-ministration initiative more accurately viewed as a new grant-

makingagency designedto stimulate a quantumincreasein fundingin a particularsector.198

'94 Compare 1978BUDGET, supra note 37, at 194, with BUDGET OF THE UNITED STATES

GOVERNMENT: FISCAL YEAR 1975, at 146(1974).195 SPECIAL ANALYSES 1978, supra note 7, at 273 (Table 0-5).'6 COMPTROLLER GENERAL, IMPROVED COOPERATION AND COORDINATION NEEDED AMONG ALL

LEVELS OF GOVERNMENT 1 (1975).197he Advisory Commission lists the following five statutes as creating block grants:

Partnerships for Health, the Omnibus Crime Control and Safe Streets Act, the Comprehen-

sive Employment and Training Act, Title XX of the Financial Security Act, and the Com-munity Development Block Grant portion of the Housing and Community Development Act

of 1974. ADVISORY COMM'N ON INTERGOVERNMENTAL RELATIONS, BLOCK GRANTS: A ROUNDTABLE

DISCUSSION1976).198 See ADVISORY COMMISSION ON INTERGOVERNMENTAL RELATIONS, SAFE STREETS RECONSI-

DERED: THE BLOCK GRANT EXPERIENCE 1968-1975 (1977). An earlier Johnson Administration

initiative, the 1966 Partnerships for Health Act, also consolidated a series of categorical

programs, but again a principal motivation was a substantial increase in funding. SeeADVISORY COMMISSION ON INTERGOVERNMENTAL RELATIONS, THE PARTNERSHIPS FOR HEALTH ACT:

LESSONS FROM A PIONEERING BLOCK GRANT (1977).

1977] 315




The most ambitious block grant proposals were the NixonAdministration's

pecialrevenue

sharingplansto consolidate

aboutone-thirdof all federalassistanceto the states into six specialreve-nue sharing programs.'99The special revenue sharing proposalsprovedto be anathemato the Congress, n partbecausethey wouldhave disruptedthe existing allocation of congressionalcommitteejurisdiction.Thereafterboth the Nixon and the FordAdministra-tions made block grantproposalson a more ad hoc basis. The onlyblockgrantsto result from that periodarethe 1973ComprehensiveEmploymentandTrainingAct,200onsolidating12categoricalman-

powerprograms,and the 1974Housingand CommunityDevelop-ment Act,20'consolidatingseven categoricalcommunity develop-ment programs of which the best knownwereUrbanRenewalandModelCities).202he CarterAdministration'sviewson blockversuscategoricalgrantsare as yet unknown.But if the CarterAdministra-tion, in line with its views on reorganizationof the federalgovern-ment, shouldalso attempt to consolidatevariouscategoricalgrant-in-aid programs,it is not at all clear that the Congresswill be

preparedo

go along.The principal arguments or blockgrantsarethat (1) categori-cal programscausewaste becausethe precisecategoriesand condi-tions are not always appropriatefor the diverse situations to befound in the states; and (2) categoricalprogramsmake it difficultforgovernorsand mayorsto governby relegating hem to the statusof administratorsof federalgrantconditionsandby restricting heir

ability to reflectthe preferencesof their constituents in the alloca-tion of resources.The leading argumentsagainst block grants are

that (1) categoricalgrantsdo not in fact constrainrecipient govern-mental units in any significantway becausemoneyis fungibleandfederalgrants-in-aidremainonly a fraction of total state and localrevenue;and (2) for a varietyof political reasons transfersto stateand local governments-particularly to large cities-would besmaller under a block grant than under a categorical grant ap-proach.To meet the secondargumentpart way, blockgrantpropos-

"99OFFICEOF MANAGEMENT NDBUDGET,

BUDGET OF THE UNITEDSTATESGOVERNMENT,FISCALEAR 972, at 11-15 (1971).

20 29 U.S.C. ?? 801-992 Supp.m 1973).20 42 U.S.C. ??5301-5317Supp. IV 1974); ee ADVISORYCOMMISSION N INTERGOVERN-

MENTALRELATIONS: HE WORKINGOF A FEDERAL-LOCALLOCKGRANT(1977).202 The 1974enactmentof Title XX to the SocialSecurityAct, 42 U.S.C. ?? 1397-1397f

(Supp.IV 1974),providing rants o the states forsocialserviceshasalso beencharacterizedas a block grant program. See ADVISORY OMMISSION NINTERGOVERNMENTALRELATIONS, LOCKGRANTS: ROUNDTABLEISCUSSION-9 (1976).

316 [44:271




als usually contain a "hold harmless"clause that providesthat no

recipientunit would receive less under a block

grantthan it

pre-viously received from the total of the categorical programsto beconsolidated in the block grant. As suggested above, a politicalobjectionto block grants in the Congress s that they wouldtend toforce a redefinitionof the jurisdictionof congressionalcommitteesand, by eliminating particular categorical programs, they mighteven eliminate the raison d'etreof some specializedsubcommittees.

D. IntergovernmentalPlanning

Taxing and spending together determine the budget surplusordeficit of each level of government.Since the governmentalsurplusor deficit is widely regardedas having a crucial impact on the econ-

omy, an important question for fiscal federalism is the extent towhich federal authorities will join togetherwith state and local au-thorities to plan an overall budgetary surplus or deficit.203 he al-most total absence of intergovernmentalplanning in the UnitedStates contrasts with the great interest in such planning in West

Germany. The Basic Law now commands multiyear intergovern-mental planning,204nd an expert commissionon constitutional re-form has recommendeda far-reachingexpansionof such planning.205

Whether intergovernmental planning as it presently exists inWest Germanyis of substantive importanceor is merely cosmetic

may be questioned,20but at least the desirabilityof such planningis widely discussed. In the United States both the substanceand thediscussion of intergovernmentalplanning are largely lacking. The

principal point of intergovernmentalbureaucraticcontact is be-tween grant-makingbureaus within the federal executive depart-ments and state or local grant-administeringagencies. But theseofficialsare concerned with the terms and conditionsof the grants-in-aid and the impact of these terms and conditions on state sub-stantive programs,not with overall fiscal planning.

203This is not to deny that therearesignificantdifferencesbetweena surplusordeficitat the federallevel and a surplusor deficit at the state or local level. The most important

differenceof course is that althoughall levels of governmentcan borrowwhen they are indeficitonly the federalgovernmentcan finance a deficitby printingmoney.204 GG arts. 106(3)(1), 109(3). It should be noted that intergovernmental lanningin

West Germanyextends beyondmacroeconomics o expenditureplanningin particularsec-tors. See id. art. 91a(3).

5 ENQUETE-KOMMISSIONVERFASSUNGSREFORM,CHLUSSBERICHTENQUfTE-COMM'N FORCONSTITUTIONALEFORM,INALREPORT],BUNDESTAGSDRUCKSACHEII/5924,at 148-93(1976).

20 Id. at 152;Baade,MandatoryAppropriationsf PublicFunds:A Comparative tudy(pt. 2), 60 VA.L. REV. 11, 650-54(1974).

1977] 317




Governmentdocuments, scholarlystudies, and the media inthe United States devote

greatattentionto the macroeconomic

ig-nificanceof the deficit orsurplusof the federalbudget.In contrast,the deficit or surplus of state and local governmentsis normallyignored in these discussions. If state and local deficits are men-tioned, they are considerednot in terms of their macroeconomic

significancebut in the contextof the "need" orlargergrants-in-aidin functionalareaswhereexpendituresaregrowingrapidly(suchas

welfare). Indeed, even where state and local governmentshave acombinedsurplus,this fact is farless important n publicdiscussion

than the "need" created by the deficit of certain state and localgovernments.207

The currentlyperceived inadequacyof conventionalmacroe-conomic theory to explain recent economic events may lead togreaterinterest in state and local finances.But even if some formof planningshould emerge,recent experience ndicates that it willnot take the form of encouragingstate and local governmentstofollow the lead of the federal governmentin runninga deficit or

surplus. On the contrary,most of the recent attention in Congressand the Treasuryhas been focusedon the difficultiesof those rela-

tively few states and municipalities (notablyNew YorkCity) thatare near bankruptcy.208

Althoughintergovernmentalplanningas such is not a featureof Americanfederalism, limited steps have been taken to ensurethat federal programsare responsiveto state and local needs andpreferences. After passage of the IntergovernmentalCooperationAct of 1968,209hichcalled in generaltermsforimprovedcoordina-

tion, the Officeof Managementand Budget issued CircularA-95.The Circularrequiresthe governmentagencies administering138federalprogramsdeemed to have an impact on local communitiesto notify various state and local institutions of proposedfederal

07Although one might gain the impression from the special pleading of state and localgovernments appearing in the press that state and local governments generally run in the red,state and local governments ran a collective surplus in 1972 and 1973 and again in the lasthalf of 1975. See 1976 JOINTECONOMICEPORT02 (Table VII/1) (1976). One hears of deficits

but rarely of surpluses. Indeed, if state and local budgets were calculated on the same"unified basis" the federal government uses, state and local governments ran a combinedsurplus in every year of the 1970s. In a unified budget presentation, trust funds and generalfunds are consolidated to reflect the effect of expenditures on the economy. Similarly, on anational income accounts basis state and local governments have been in collective surplussince 1968. ECONOMICEPORT FTHEPRESIDENT72 (Table B-73)(1977).

" See, e.g., New York City Seasonal Financing Act of 1975, 31 U.S.C. ? 1501 (Supp. V1975).

20942 U.S.C. ?? 4231-4233 (1970).

318 [44:271




development projects and to permit them to comment on those

projects.In

turn,local

governmentsare

requiredto

notifystate

governorsand a regional "clearinghouse"beforeapplyingforfederalassistance so that otheraffectedgovernmentsand organizationscanbe made aware of any projectthat will have an adverse impact onthem and may file commentsalongwith the application.The Circu-lar A-95 processworks well when all parties comply with its provi-sions, but complianceappearsto be spotty. Nevertheless,even if theCircularA-95processworkedperfectly,it would still be an informa-tion system rather than a planning system.21'

CONCLUSION

The past few years in the United States have seen a fundamen-tal shift in public attitudes in fiscal matters. Fromthe periodin the

early 1960swhen the principal problemappearedto be "fiscaldrag"(that is, the possibility that the tax system might producemore taxrevenues than would be spent and hence drag the economy into

recession), the United States has reacheda periodin the mid-1970s

where many, if not most Americansbelieve that there is no longerany way of financingthe basic needs of the country.

No doubt the truth lies somewhere between these extremes.What is significant here, however, is that throughout the entire1960-1977periodit has neverbeen seriouslysuggestedthat the Con-stitution stood in the way of desirable change. Indeed, one has to

go backto the periodbetween the 1894Pollock decisionand the 1913ratificationof the sixteenth amendment to find public controversyover the Fiscal Constitution.211When the need for fundamental

change has become widely recognized, change has taken the formof "framework"egislation, most recentlythe CongressionalBudgetand ImpoundmentControlAct of 1974.212

Meanwhile, fiscal federalism has continued to flourish. Evenwhen a crisis like that of New York City erupts, no one seriouslyquestionsthe futureof Americanfederalism.At most, it is assumedthat pragmatismwill lead to ad hoc accommodations.To be sure,the expansion of federal legislation and the federal budget causes

some pessimists to worry about the future of the states. But the

210For further discussion of the Circular A-95 process, see COMPTROLLERENERAL,M-PROVEDOOPERATIONNDCOORDINATIONMONG LLLEVELS FGOVERNMENT1975); OFFICE FMANAGEMENTNDBUDGET,CIRCULAR-95: WHAT T IS, How IT WORKS1974). The text ofCircular A-95 may be found at 38 Fed. Reg. 32874 (1973).

211See text at note 82 supra.212 31 U.S.C. ?? 1301-1407 (Supp. V 1975), discussed in text at notes 39-43 supra.

1977] 319




growthof grants-in-aidoffsets the growthof the federalestablish-

ment. If the states have anything to fear, it is not that they willdwindle in size relative to the federalgovernment,but ratherthattheir freedomof action will be constrainedby the terms and condi-tions of grants-in-aid.Yet the success of generalrevenuesharing,the interest in block grants, and recent SupremeCourt decisionssuch as National Leagueof Cities v. Usery213 re strawsin the wind

suggestinga renewedindependencefor the states.Beneath the surface of change are the undeniable facts that

state and local governmentsspend about three-fourthsas much as

the federal government,14hat they employ many times as manypeople, that they continue to pursuewidely differentexpenditurepolicies in such basic areas as education and transportation,andthat there has been no seriousattempt to equalizerevenuesamongthe states. Whatever the state of health of federalismgenerally,fiscal federalismis still very much alive.

213426U.S. 833 (1976),discussed n text at notes39-43supra.214

See text and note at note 136supra.

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Documents

Dam. the American Fiscal on