How Less Can Be More: Using the Federal Income Tax to Stabilize State and Local Finance

Abstract

Governments at all levels – federal, state and local – are suffering through ever more severe budget crises. The interests of these different levels of government are often assumed to be in conflict. For instance, it seems reasonable to believe that if the federal government were to get its finances in order then that would mean less aid to the states. Yet this common assumption is not necessarily correct; what if the federal government saved money through cutting subsidies that are likely doing more harm than good? Currently, the Internal Revenue Code is doling out more than one hundred billion dollars per year in just such subsidies to the states. If these subsidies were cut completely, then this alone would go a long way towards resolving the disputes that are now regularly threatening to bring the federal government to a standstill. This Article advocates deep cuts, but not the complete elimination of these subsidies because much smaller subsidies could be better focused on enhancing state and local fiscal stability, and this would mean that the federal government would be spending less while aiding the states more. Most centrally, this Article advocates that the federal government encourage states to use the local property tax in contrast to more volatile revenue sources.