Guest Essayist: Nicholas Jacobs

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Although written more than 230 years ago, the United States Constitution contains a highly sophisticated — some might even say, modern — theory of public finance.[1] Other regimes had tried federated or confederated government (including the United States from 1781 to 1789 under the Articles of Confederation). But, the type of federalism outlined by the Constitution was an unprecedented experiment, because it gave the general government and each of its smaller, constituent governments independent taxing authority — a system known as concurrent taxation.

Hamilton’s Argument

In establishing an arrangement for concurrent taxation, the Constitution increases the likelihood that budgetary decisions reflect the needs and wishes of the country’s diverse political community, and decreases the likelihood that government spending is wasteful, obscure, and overly burdensome on specific groups of taxpayers. In short, by creating more government, Americans should pay fewer taxes.

This logic is explored — as much of the Constitution is — in The Federalist Papers. Essays number 10 and 51 might get all the fanfare, but at least a dozen individual essays, primarily written by Alexander Hamilton, deal exclusively with the logic of taxing authority. And, while Hamilton’s persuasive and innovative theories of concurrent taxation might not make for an exciting Broadway musical, these essays are among the most enduring and consequential arguments for designing government here in the U.S., and throughout the 19th and 20th centuries.

First, the Constitution is an arrangement that gives each government independent authority for raising revenue. Arguably, this is the single most consequential revision to the Articles of Confederation, which had made the national government dependent on state governments for all its revenues. It is the proximate cause of nearly all objections levied by the Anti-Federalists, because, independent taxing authority is an unambiguous method for creating a more powerful federal government.

As Hamilton describes, the new federal government needed financial independence from the state governments because “a complete power…to procure a regular and adequate supply of revenue, as far as the resources of the community will permit, may be regarded as an indispensable ingredient in every constitution.”[2] During the American Revolution, and in its immediate aftermath, the general government struggled to finance its most basic obligations, including the maintenance of an Army during war. In giving the federal government taxing powers, the framers gave the federal government independence.

However, the Constitution not only establishes independent taxing authority, it also underspecifies the various sources of tax revenue each government can levy.[3] The 1787 Constitution prohibits taxation on just one type of revenue: taxes on exports. And, it reserves only one type of tax to the general government: taxes on imports, or tariffs. It is silent on every other conceivable form of taxation. That silence, though, is not an omission, but a deliberate design principle. First, it ensures that all governments within the constitutional order have access to funding sources in the event of some unforeseen exigency. Drawing on the experience of Great Britain’s Parliament, Hamilton was especially concerned with how the new federal government would raise money during times of war or insurrection. Limiting the federal government to just one type of revenue, say, tariffs, would handicap needed revenues, and potentially cause adverse economic effects domestically and abroad.

The under-specification in revenue sourcing also has important implications for the states. For one, they maintain the same guarantees for exigent expenses as does the federal government. They possess access to resources in order to respond to citizen demands, and they are not constitutionally prohibited to raise monies from new sources as needed. Not only that, but, as Hamilton makes clear, the new Constitution provides plenty of opportunity for the states and federal government to cooperate in the collection and distribution of revenues. As he writes in Federalist 36, if the general government begins to tax a revenue source already occupied by the states, “the United States [federal government] will either wholly abstain from the projects preoccupied for local purposes, or will make use of the State officers and State regulations for collecting the additional imposition. This will best answer the views of revenue, because it will save expense in the collection and will best avoid any occasion of disgust to the State governments and to the people.”

Therefore, concurrent taxation encourages intergovernmental cooperation. It is a cooperation defined first and foremost by efficient tax collection — the reduction of government expense by the sharing of administrative processes — as well as transparency. In the above passage, the guardians of the public revenues are the state legislatures, who have an interest in maintaining their own fiscal authority and independence, and, most importantly, the people themselves, who have little desire to give away their hard-earned dollars to a wasteful government. Governmental cooperation — land grants, targeted appropriations, administrative assistance — had to be “substantially mutual and reciprocal.”[4] If states and the federal government wanted it, and if both benefited from the intergovernmental scheme, nothing in the Constitution prohibits such arrangements. In fact, the Constitution seems to demand it if it is in the people’s best interest.

Moreover, as John Kincaid notes, such under-specification of tax authority gives special power to the House of Representatives as a “regulator” of federalism. While most constitutional analyses emphasize the Senate and the Electoral College as the safeguards of American federalism, Hamilton’s analysis reminds us that it is ultimately the people who get to decide what type of federalism they want. All revenue bills must, after all, first be introduced in the House of Representatives, which is, as Madison writes, the “most complete and effective weapon with which any constitution can arm the immediate representatives of the people.” And since revenues are the lifeblood of any government, the institution with the greatest influence on that relationship occupies a prominent place not only at the national level, but within the states and localities as well.

Intergovernmental Concurrency: Was Hamilton Right?

Just because Hamilton ordained fiscal-federalism to be so, does not mean that the United States developed according to plan. In certain important respects, the current system of intergovernmental finance (including the independent revenue authority of the states and localities) fails to meet Hamilton’s lofty predictions for how the new Constitution would operate.

Since most of the federal government’s cooperation with states and localities takes place through the use of grants (as described in the last essay), it makes sense to consider whether this fiscal instrument fulfils the constitutional spirit outlined in The Federalist. To be sure, the U.S. Supreme Court has clearly ruled that grants are constitutional,[5] but asking whether the system of grants-in-aid maintains financial concurrency is not a legal question. Do grants satisfy the institutional principle of mutual and reciprocal cooperation?

There are more than 200 individual federal grants to the states and localities, administered across 30 different federal agencies. There are some, to be sure, that meet the rigorous standard of mutuality — equal benefit for state and national goals — and reciprocity — equal influence by the states and federal government. But changes to the American political system and the expansion of federal spending authority has limited the extent to which the grant system meets these standards.

First, it would be a mistake to neglect the significant amount of mutual and reciprocal cooperation that did take place throughout the 19th century and early 20th century. These demonstrate that such type of cooperation can, and has, existed in the U.S. For instance, the national government in 1862 passed the Morrill Land Grant Act, which provided states tracts of federal land to fund state colleges with a specific focus on agricultural and mechanical sciences. States were not compelled to participate, but could choose to if it advanced the community’s interest. Given the extraordinary broad discretion granted to state legislators for selecting the location, choosing the courses of study, and the establishing the governing body of the college, every state participated.

Few grant programs today operate in this way. For one, most states are compelled into participation because failure to participate in one negates participation in another. Rather than forfeiting a small sum of money tied to one particular program, a state risks losing all federal funding for a large area of government services. Additionally, as discussed in the previous essay, grant funding is also used to impose mandates on states and localities, which means that federal grants only fund a portion of the true cost of any one federal program. States must make up the revenue elsewhere either by raising taxes, or cutting state governing expenses.

Grant programs vary in the amount of discretion given to states and cities for setting program goals, eligibility criteria, and benefits paid. Yet, even among the most flexible grant programs — often called “block grants” — goals are set by federal departments and agencies with minimal state involvement. The 1978 revision to the Community Development Block Grant, for instance, mandates that states spend 30-percent of all granted funds in rural areas, regardless of the states’ demonstrated need or preference. But even when goals are left undefined, grants might have perverse political effects that conflict with state-level goals (or even national ones). For example, the 1968 Safe Streets Act and its successor, the 1996 Local Law Enforcement Block Grant, was a testament to intergovernmental cooperation. In providing millions of dollars to localities to modernize police forces, states and cities eagerly pursued these grants to help fund police services. Yet, as scholars have recently identified, these programs created demand for government services — namely, prisons and policing — when little demand existed before. Moreover, following the terrorist attacks on September 11th, localities used these grants to purchase military-grade weapons from the federal government — lest they lose available money — with little knowledge from the policed community.[6] If a hallmark of liberal democracy is that government policy reflects the will of the governed community, police militarization and mass incarceration raise important questions about how decisions to finance the expansion of local, state, and federal governments were reached and sustained. It is a question about taxes and spending.

Hamilton likely under-estimated the political potency that federal grant programs have. When states refuse to participate and risk losing federal funds, citizens accuse government officials of leaving money on the table — and not without cause. Federal transfers to the states are funded, after all, by citizen tax dollars. In recognition of this fact, for almost fifteen-years, the states and federal government experimented with general revenue sharing (GRS) agreements, which took the place of narrower grant programs. States were provided an incentive to spend money, thereby reducing some of the negative pressures from turning down funds for grant programs. State and local officials celebrated GRS for its consistency and flexibility; officials could use the funds without restriction. Congress, with the support of the Reagan administration, abolished GRS in 1986, and re-converted many of the programs to categorical grants more susceptible to political control. In the end, GRS demonstrated that budgets are political tools, and politicians are not likely to give up the control that comes with taxing and spending authority.[7]

Nicholas Jacobs is a Faculty Research Associate in the School of Civic and Economic Thought and Leadership at Arizona State University, where he also serves as the assistant project director of the Living Repository of the Arizona Constitution. He has published numerous scholarly articles on intergovernmental politics, American political history, and the American presidency.

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[1] Vincent Ostrom has made this connection most explicit in a rich and detailed exploration of The Federalist: Vincent Ostrom. 1987. The Political Theory of a Compound Republic: Designing the American Experiment, Second Edition. Lincoln, NE: University of Nebraska Press.

[2] Federalist 30.

[3] This is the primary subject of Federalist 35.

[4] John Kincaid. 2017. “The Eclipse of Dual Federalism by One-Way Cooperative Federalism.” Arizona State Law Journal 49: 1062.

[5] While the Supreme Court dismissed Massachusetts’s claims against the 1921 Shephard-Towner Act, which provided $1-million in grant assistance to states for prenatal and newborn care, Justice Sutherland’s unanimously supported obiter dicta demonstrated that the court did not view voluntary grants as unconstitutional infringements on state sovereignty: Massachusetts v. Mellon, 262 U.S. 447 (1923).

[6] Christopher J. Coyne and Abigail R. Hall. 2018. Tyranny Comes Home: The Domestic Fate of U.S. Militarism. Stanford, CA: Stanford University Press.

[7] Timothy J. Conlan. 1998. From New Federalism to Devolution: Twenty-Five Years of Intergovernmental Reform. Washington, D.C.: Brookings Institution Press.

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