Introduction
Fiscal federalism is a system of taxation and public expenditures in which the rights to receive income and manage expenses are vested with various levels of government: from national governments to small local administrations. In other words, it is about the separation of powers between federal and regional authorities in the financial sphere. Fiscal federalism in the United States is one of the national system’s main characteristics. The U.S. Constitution grants the right of taxation to the federal government, states, and separate regions, creating a complex system of financial interaction between different levels of government. Today, fiscal federalism is of particular interest due to the economic downturn against the background of COVID-19 (Congressional Research Service, 2020). Some aspects of the system require separate consideration in this paper. Fiscal federalism is a financial framework with advantages and disadvantages regarding relationships between federal, state, and local governments.
Analysis of the Theory of Fiscal Federalism
The theory of fiscal federalism is based on the proposition that a federal system of government most effectively addresses today’s problems by allocating resources fairly, accurately, and objectively to maintain stability. Fiscal federalism refers to the distribution system of financial and administrative responsibilities by federal, state, and local governments. The famous economist Richard Musgrave explained this concept in 1959 to define the theory of decentralization in the U.S. public sector. (Kapucu, n.d.). In a narrow sense, this term is dividing and distributing tax revenue sources according to a specific formula between a country’s budget system levels. In a broad sense, fiscal federalism can be characterized as a complex and multidimensional set of relations in the tax sphere between the Federation, the subjects of the Federation, and local governments due to the need for effective implementation on an independent basis enshrined in the Constitution, federal treaty and other legislative acts of the range of powers in the national interests.
In the U.S., the theory of fiscal federalism, to a greater extent, focuses on the system of transfers through which the federal government shares its revenues with state and local administrations. Agranoff (2017) states that the American federalism tradition balances Jeffersonian subnational rights and responsibilities with Hamiltonian-involved general government activity. Fiscal federalism emphasizes a fair, reasonable, and equitable distribution of income and resources to realize financial stability. As practice shows, achieving these aspects is possible through the federal government’s flexibility and dexterity (Kapucu, n.d.). The central government carefully controls the function of macroeconomic stabilization and support for people with low incomes (Oates, 1999). According to the Tenth Amendment, “the powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people” (Edwards, 2022, p. 1). In this case, the federal government has limited powers, and most government functions are left to the U.S. states. The U.S. federal government is responsible for the competent redistribution of expenditures, but using funds is the direct responsibility of states and local authorities.
A study of the Bible allows one to look at the theory of fiscal federalism from different perspectives. The federal government is an essential link in fiscal federalism, which collects the main taxes and distributes them between U.S. states and local governments following specific rules. The Bible pays attention to this moment, perceiving it as effective and efficient in overcoming obstacles and solving various difficulties. It says: “And they judged the people at all times. Any hard case they brought to Moses, but any small matter they decided themselves.” (English Standard Version Bible, 2021, Exodus 18:26). There must always be a higher authority taking on the responsibility and obligation to help and support other less influential leaders. At the same time, those under the federal government’s administration should be no less active. Relying on the government’s help, they should correctly determine in which direction to move to achieve the best results.
Additionally, fiscal federalism permits the distribution of resources fairly to support state operations at any level without depriving anyone. On this point, the Bible encourages such mutual support: “But if anyone does not provide for his relatives, and especially for members of his household, he has denied the faith and is worse than an unbeliever.” (English Standard Version Bible, 2021, 1 Timothy 5:8). Consequently, fiscal federalism works in a way that “shares” tax revenues with lower levels of government, maintaining a balance. The U.S. federal government considers a wide range of factors and events to determine the exact amounts allocated to implement plans and projects of states and local regions. This approach is reasonable and practical, as it helps strengthen social and economic stability throughout the country and develop some areas, ensuring the nation’s well-being.
The theory of fiscal federalism has many benefits concerning distributing wealth and resources between U.S. states and regions. If public resources are sufficient and remain adequate, distribution is based on fair criteria, and local communities participate in the discussion of decisions (Rotulo et al., 2020). It contributes to the decentralization of power, allowing local levels to make decisions that suit their specific needs and requirements. Primarily, it promotes more effective policies, considering regional and local differences (Kapucu, n.d.). This system implements the country’s decentralized governance, allowing each region to develop and manage its local finance system. At the same time, the federal government will always support financially during inevitable crises like the Great Recession of 2008 to 2009 (Kim, 2019). States and individual localities are different in income, and help from the federal government is primarily needed to solve such problems (Kapucu, n.d.). The model ensures economic growth and prosperity, promoting local freedom. It implies a precise distribution of expenditure powers between all levels of government and a minimum sphere of joint competence. A constitutionally enshrined mechanism of financial equalization implies vertical and horizontal equalization of revenues of regional and local budgets through specifically defined taxes.
Despite the above advantages of the theory of fiscal federalism, it has disadvantages and weaknesses. According to Oates (1999), the model’s fundamentals are imperfect and need some refinement since it highlights obvious points regarding economic efficiency. The author claims that significant informational and political constraints prevent central programs from generating an optimal structure of local results (Oates, 1999). Unfortunately, it is sometimes challenging to divide responsibilities optimally because of different subjective views about the role of government (Congressional Research Service, 2020). Fiscal federalism limits the ability to counter “scalar dumping,” which undermines fiscal sustainability (Kim, 2019). States and local governments suffer significant under-resourcing and competition among jurisdictions during major emergencies (Cigler, 2021). Excessive autonomy can lead to a breach of state unity by strengthening the position of several regional leaders. The pursuit of the most prosperous regions leads to economic autonomy and isolation. There is a high probability of losing central government control over regional authorities’ budgetary and fiscal activities. At a minimum, this is only a small number of imperfections in the model that require separate consideration and eradication.
Regarding factual data and biblical motives, the fiscal federalism model generally contributes to the United States’ sustainable economic and political system. Fiscal federalism has formed a fundamental key to understanding the relationship between central and regional governments and has contributed to developing financial models for federal states such as America. According to Valdesalici (2018), the fiscal federalism model is a dynamic process involving shifting powers, duties, and responsibilities in favor of the central or the decentralized tiers of government. This procedure is necessary to improve economic efficiency and achieve public policy goals (Congressional Research Service, 2020). Valdesalici (2018) argues that, at the moment, there is no universal definition of the term; this system can be seen as an evolution of the notion of a fiscal constitution, which appeared in 1977. The fact remains that this model allows flexibly solving pressing economic problems through the federal government’s interventions. Several hundred federal programs are determined to support education, health care, housing, transportation, and many other human activities in states and local regions (Edwards, 2022). All of the above aspects define the versatility and diversity of the theory and model of fiscal federalism.
Advantages/Disadvantages of Fiscal Federalism to States with Example
The fiscal federalism model is crucial for the prosperity of the U.S. states. The federal and state governments are interdependent in their decisions and actions, interacting with each other to achieve coherent and practical results (Congressional Research Service, 2020). The model promotes cooperation between states and the federal government in solving problems such as economic inequality and environmental challenges. According to Valdesalici (2018), this model enables regions to cope with the democratic deficit and financial instability by combining local players’ powers. States can strengthen their finances and reduce fiscal deficits by making decisions about tax collection, investment attraction, and economic development to ensure a stable and sustainable fiscal framework.
States are responsive to local events and citizen interests, more easily adapting budgets to the needs of populations in several areas. For example, they help citizens get legal and medical services, buy real estate, find jobs, and more. Thus, due to fiscal federalism, U.S. states have the authority for major programs such as welfare, Medicaid, legal services, housing, and job training; state administration benefits all the region’s citizens equally (Oates, 1999). The government is focusing on the healthcare needs of the states and the role of Medicaid (Clemens et al., 2020). The federal government’s role is more prominent in increasing collective welfare, for instance, when taxpayers move freely across the states or when there are side effects from the national provision of some products (Congressional Research Service, 2020). States have more autonomy in financial management following the current political, economic, spiritual, and social atmosphere.
Nevertheless, fiscal federalism can allow inequality between states regarding access to financial resources. For instance, states with weaker economies or smaller populations may have less money for their programs and projects, while wealthier states can afford more generous budgets. Many states face severe institutional constraints in the context of debt and fund withdrawals and cannot declare bankruptcy, as local governments do (López-Santana & Rocco, 2021). State and local governments have limited means for traditional macroeconomic control of their economies (Oates, 1999). Fiscal federalism can lead to a lack of coordination and consistency in fiscal policies among states. It can make it challenging to solve national problems and create competition among states to attract investment or provide social services. Some states may be more vulnerable regarding financial stability and have trouble balancing their budgets, especially during economic crises. State and local governments are less able to respond countercyclically to economic shocks (López-Santana & Rocco, 2021). Fiscal federalism can create uncertainty and instability in funding states since they rely on their sources of revenue, such as taxes. States can experience financial difficulty and difficulty securing their core functions and obligations if those revenues decline.
Advantages/Disadvantages of Fiscal Federalism to Local Government with Example
Equally important is the role of the fiscal federalism model for local governments and their activities. The model’s advantage is the relative independence of the regions from the center and the minimization of redistributive processes in the fiscal system. It is evident that through this system, local authorities can effectively adjust social expenditures to meet residents’ needs, offering services at low prices (Kim, 2019). Regional authorities are closer to local citizens and better understand residents’ needs and fiscal federalism contributes to more efficient use of financial resources. For example, they are urbanizing a town, building new houses, opening schools and clinics, and supporting new entrepreneurs, all to keep the city alive and thriving. This moment is more suitable for solving problems by actively participating in decision-making.
The autonomy of regional authorities and representative bodies of local self-government is in the establishment, cancellation of taxes, and changes in the elements of taxation. Region authorities implement their tax policies and budget plans, considering the peculiarities of their economies and social spheres. Notably, competition between local authorities promotes organizational and political innovations (Kapucu, n.d.). Fiscal federalism encourages competition among particular territories and states in economic development, involving investors and developing innovative solutions. It seems possible to use a variety of tax rates and incentives to attract entrepreneurs and strengthen the competitiveness of some regions.
Some regions may face the problem of dependence on financial support from the central government or more affluent regions. This moment can create unequal development conditions and limit such regions’ financial autonomy. According to Kim (2019), local governments often lack institutional power in the federal system, and the heterogeneity of local governments makes collective action difficult. For example, due to this, risks of corruption and regional tensions are likely to develop and spread and local governments may have limited control over their financial resources.
Some tax revenues are collected and redistributed at the central level or among different regions. This can limit the regions’ ability to plan and use funds according to their specific needs and priorities. Changes in tax policy, industrial changes, or economic crises can reduce regions’ revenues or alter their financial needs. Fiscal federalism can limit regions’ ability to respond quickly and effectively to such changes. Regions may face competition in terms of attracting investment or development. More prosperous regions can attract more investment and development opportunities. Changes in tax policy or the rules for allocating financial resources can create uncertainty and potentially negatively affect individual regions. If the government decides to reallocate funds or change tax rates, it could result in financial hardship or reduced revenues for some regions.
Conclusion
Fiscal federalism is a complicated and multifaceted system that divides powers and funds between the government, states, and local regions. This model’s guiding principle is to allocate resources intelligently among several levels of government to achieve financial and political goals, expressing the country’s interests and meeting citizens’ needs. The model of fiscal federalism promotes decentralization of power, and cooperative decision-making, distributes revenues among regions, provides financial support in times of crisis, and ensures economic growth and prosperity while preserving local freedom. At the same time, the model of fiscal federalism has disadvantages, such as limitations in economic efficiency, difficulties in defining responsibilities, and the risk of losing control of the central government. It can lead to inequalities between states and individual regions concerning financial resources. However, these shortcomings require further refinement and elimination. Bible study offers an interesting perspective on the model of fiscal federalism. It emphasizes the importance of the federal government in allocating resources and supporting less influential leaders. Fiscal federalism promotes an equitable distribution of resources, maintaining the balance and well-being of the nation.
References
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