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Revenue Sharing

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USA Today reports,

In a historic first, Uncle Sam has supplanted sales, property and income taxes as the biggest source of revenue for state and local governments.

Thanks to Nick Schulz for the pointer. The gist of the story is that this is a cyclical phenomenon, with the recession hurting state tax collections and stimulus spending making up the difference.

My prediction is that this will persist even when there is a recovery. It is bad news in many respects. It makes the spenders (in this case, state and local governments) even less accountable for making sure that money is well spent. For the politicians, the incentive to spend other people's money is big enough when its your own constituents paying the taxes, and it's even bigger when someone else's constituents are paying the taxes.

UPDATE: The Heritage Foundation blog points out how much the Federal contribution to state and local Budgets has varied under different Administrations.

Comments and Sharing

COMMENTS (5 to date)
Gene writes:

Agreed. That more people (of many political persuasions, not just the small-gov or libertarian folks) can't see the problem with this is a good illustration of the failure of public discussion around these issues.

Alex J. writes:

This may wind up being a federal spending item which it is politically (relatively) easy to cut.

El Presidente writes:

A greater concern, in my opinion, is not that they will spend other people's money more freely, but that federal priorities will supplant local constituent priorities (neither necessarily good or bad). This opens up space for rent-seekers to capture federal dollars through local governments. The feds say "I didn't do it" and the locals say "It was free money". I have no doubt that people want government to spend _some_ money, despite libertarian criticism that government spending is the original sin, or some such thing. There are legitimate and well-supported government functions. The public by and large dismisses the idiotic notions of open-source policing and national defense. They also tend to embrace some forms of redistribution, and more so as they have greater need of it. I would prefer ordinary constituents participated more in the appropriations process, and that requires knowing where the money is coming from and what it is being used for. This becomes more difficult when the money takes the circuitous route of federal appropriations for local expenditures.

However, in places like California where local governments are hamstrung by state laws that strictly curtail their taxing powers in ways that make absolutely no sense in terms of economics or political process (but very good sense in terms of maximizing the profits and wealth of land owners a la British Corn Laws), federal dollars become life support and voters are disinclined to contemplate the wisdom of the funding mechanism. The anti-tax movement created a situation in which a policy thwarting legitimate taxation has encouraged the use of an intermediary taxing authority and attendant loss of local constituent control. Our current predicament is the political climax of an economic mistake. I'd pass the libertarians a towel to wipe-up . . . if we could afford one.

Peter writes:

Have a look at the Australian State Governments if you want to see the irresponsibility that can develop when a large source of funds is transfer payments from the Federal Govt.

Tim T. writes:

IMO, "cyclical phenomenon" and "historic first" don't go together too well.

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