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p The bulk of spending for civilian purposes in the United States is made through state and local budgets, as pointed out in the preceding chapters. Current and capital outlays on education, health and social welfare are mainly financed from state and local budgets, including money received from the federal budget as subsidies for these purposes.

p In contrast to most West European capitalist countries where the system of local budgets was shaped under the influence of central legislation, in the United States local legislation arose before federal. This is one of the reasons for the diversity of forms of the budgetary structure of states and local administrative units as well as the intertwining of many functions performed at the federal and state-local level.

p In the course of the country’s economic and socio-political development, the organisation and structure of local finance gradually changed. But these changes were not aimed at creating a single unified budgetary system. On the contrary, the financial relations of the states and the federal government were constantly complicated and differences between states increased.

p The 1787 Constitution provided for contributions of the states to the budget of the federal government in proportion to the value of land and improvements.  [146•1  The states 147 independently looked for sources to satisfy their own needs and to make payments to the federal authorities. They practically felt neither direct nor indirect influence of the federal government on their financial policy as regards budget revenue and expenditures in their territory.

p But under the Constitution proclaimed in September 1787 the rights of Congress were greatly extended. It was given the right “to lay and collect taxes, duties, imposts and excises, to pay the debts”. Moreover, direct taxes and duties per capita were spread among the states in proportion to the size of population. The federal government still could not introduce direct taxes.

p At the same time, this Constitution, which in effect initiated the delimitation of financial functions between the federal government and the state and local governments, did not establish precise boundaries. Moreover, they subsequently became much more blurred.  [147•1 

p Throughout the 19th century the budgetary duties of the federal government and the states changed slowly and only after the Civil War were essential shifts initiated. States were exempt from contributing for defence expenditures which became the exclusive function of the central government.

p With the introduction of an income tax in 1913 and an inheritance tax in 1916, the federal government received the most effective taxation sources. In the meantime the rights of the states in tax legislation were steadily restricted. The introduction of progressive taxes on property, duties on interstate trade, and so on was specifically prohibited.

p The concept of a division of governmental functions based on state interests was replaced by a new “federalism of co-operation" which signified the dominant position of the federal government in solving all general national financial problems, including questions of the financial position of the states. It enabled the federal authorities, within constitutional bounds and legal restrictions, to actively intervene in the financial activity of states and local administrative bodies through the system of government-controlled grants. 148 Studying the consequences of federal grants-in-aid, Murray Weidenbaum noted: “This results in the federal government’s not only reviewing the use to which its funds are put by the states but also reviewing the matching funds which the states put up themselves."  [148•1  Thus the central government concentrates in its hands greater financial resources than the states and local authorities. Under the existing structure of the distribution of functions, the budgets of state and local governments are charged primarily with the responsibility of financing the numerous current and long-term civilian needs. They are linked both with general national needs and with tasks inherent in state and local government functions embodying a great variety of requirements. These needs flow from general economic growth as well as the peculiarities of particular areas, their geographical location, density and concentration of population, local traditions, economic trends, transport facilities, and so on.

p While the federal government in allocating financial resources encounters a great number of alternatives in making political and economic decisions, the sphere of financial decision-making of state and local authorities is much more limited. They have to solve urgent current problems which can no longer be deferred.

p Referring in this sense to the question of allocating financial resources, Arnold Cantor pointed out: “It cannot be assumed that 50 state legislatures and some 81,000 localities are in a better position than the federal government to weigh and balance these critical national priorities and spend accordingly."  [148•2 

p But insufficient financial resources place the states and local governments in a difficult position in respect to securing funds for even the most essential needs.

p Pointing to the significant role played by state and local budgets in meeting the needs of the population, Frank Fernbach, Assistant Director of the AFL-CIO Department of Research, writes: “When it comes to providing for the 149 civilian public services the American people need, it is the states and localities—not Washington—that shoulder most of the load."  [149•1 

p The structural shifts in economic development, the movement of large masses of the population from rural areas to cities and the reorganisation of industry, research and education under the impact of the scientific and technological revolution, are constantly raising the role of public services. The state and local authorities are faced with new problems linked with the spending of funds.

p One of the main features in the evolution of the financial position of state and local governments at the present stage is the rapid rise in financial needs and the relative curtailment of their own sources.

p Notwithstanding the sharp increase in the absolute expenditures within state and local budgets after the Second World War, their ratio to the GNP decreased as compared with the 1930s.

p Comparing the sources of revenue of the federal government and the state and local governments, Joseph Pechman draws the conclusion: “Most federal revenues come from income taxes that rise at a faster rate than income as income grows. By contrast, state-local revenues barely increase in proportion to income."  [149•2 

p The widening gap between the swiftly growing demands made on the volume and quality of public services and the limited finance from their own sources has predetermined another important feature of state and local budgets— dependence on federal government grants. Moreover, the central government finances national programmes through the states, partly also enlisting local money resources as a condition for providing grants-in-aid.

p Thus, with the high level of administrative independence proclaimed by the US Constitution, state and local governments are subject to strong direct and indirect restrictions of their freedom in financial activity by the federal government. Referring to the distribution of revenues by the 150 central government, Benjamin Masse pointed out: “That the power trend over the past 40 years has been toward Washington and away from the states is obvious."  [150•1 

p While seeking to get maximum help from federal funds, states and localities are often compelled to reduce spending for the most urgent needs because grants-in-aid almost always presuppose the participation of the states in financing such programmes.

p The state dependence on the federal government is also increased by the fact that in allotting them grants the use by states of their own sources is taken into account. That is why, notwithstanding the fact that the states independently enact, execute and control their own budgets, they have to take into consideration the main finance-management principles of the federal authorities.

p The historically shaped uneven economic development of the country’s individual regions in conditions of considerable administrative state autonomy, has resulted in sharp differences in the structure of revenue and expenditures of particular states and local governments. Their budgetary procedures, classifications, forms and types of reports, are characterised by great diversity, including the types and rates of taxes, relationships of items of expenditure, the size and purpose of loans and the distribution of functions between states and the local administrative bodies under their jurisdiction.

p This makes it exceedingly difficult to analyse local budgets and to compare specific revenues and expenditures by state and local governments. As a result, it is impossible to determine, with sufficient accuracy, the actual degree of the states’ needs in allotting federal grants for levelling out state and local differences. “Comparisons of state government expenditures are treacherous,” Maxwell says, referring to the problem of comparisons between states. “In State A the government may perform functions that in State B are left to localities."  [150•2  He suggests using per capita revenues and expenditures in the states and localities as a more proper basis for comparisons.

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p A study of summary data on state and local finance cannot compensate for this structural defect because it produces only average figures.

p The basis for comparing the revenue and expenditure of individual states and local governments, which Maxwell recommends, that is, money receipts from their own sources (per $1,000 of personal income), has a drawback. In a situation of regressing local taxes this indicator conceals the degree of influence exerted by existing taxes on budgets of families in the lower and middle income brackets.

p The situation is also complicated by the fact that no firmly fixed criteria exist for fixing the size of federal grants to states and local governments.

p Martin McGuire and Harvey Garn, comparing various proposals in respect to the choice of criteria in determining federal grants, note: “First, one is obliged to deal with the fact that no single unambiguous measure of ’poverty’ or ’community need’ exists. Often, a single government program may be directed against diverse, more or less uncorrelated conditions of economic (or social) distress."  [151•1 

p This specific feature of state and local budgets is determined by the extremely uneven development of the capitalist economy, in which attempts at governmental regulation come into contradiction with private production, whose main stimulus is the maximum increase in profits and not equalisation of the socio-economic conditions of the population of individual regions and different sections of society. On the other hand, the private sector yields to state regulation only indirectly and on an insignificant scale.

p The functioning governmental financial system cannot be quickly adapted to the constant economic shifts, as a result of which a gap arises between current needs and the possibilities of satisfying them.

p While all states require increased revenue for public needs, the position of individual states, especially of their local subordinate units, have reached a critical point.

p The big differences in per capita income levels in individual 152 states, especially between industrial and agricultural areas, also largely determine the financial possibilities of the respective authorities.

p The state of Mississippi which had the lowest per capita income, for example, is trying to compensate for this by high tax rates. But this measure brought the state and local authorities only $204.41 per capita in budget revenue in 1969, while per capita revenue of $356.59 is obtained in Connecticut at lower tax rates.

p Under a unified financial system, it would be obvious that states and local governments with a higher level of individual and corporate incomes, have greater possibilities of spending money for public needs. But in reality some of the states which have a low tax base spend considerably more money than the “richer” states.

p This is explained by other factors which dictate greater spending of resources from public funds. The expansion of metropolitan areas because of the outmovement from rural localities, intensive concentration of industry, the creation of new scientific centres, the greater mobility of the population resulting from improved transport facilities, the change in the population age composition, and many other factors have engendered demands for a higher level and a wider scale of public services. To this should be added the point that the carrying out of a number of public measures was delayed by the Second World War and the war in Korea and in Vietnam.

p Rapid urban development and the rise of urban conglomerates in recent decades have seriously influenced the general financial position of states and especially of municipalities and counties. The scientific and technological revolution has accelerated this process. A steep increase in local resources has become necessary for such purposes as the building and maintenance of hospitals, sewage installations, parks, schools, water supply systems, libraries, airfields, housing, maintenance of police and fire protection and the social welfare system.

p Since the cost of public services to the urban population is much higher than to the rural, there is an increased utilisation of federal, state and local governmental resources by the cities. The situation in metropolitan areas reveals 153 the aggravation of the extremely acute deficiency of resources for meeting pressing needs and budget deficits.

p Frank Fernbach who made a study of urban problems, concludes: “For example, the crisis of transportation—of moving goods and people into and out of the core city— must be met. The never-ending task of finding enough revenue to meet educational and recreational needs, provide adequate water for human and industrial consumption, cope with air pollution, combat delinquency and crime, clear slums and assure decent housing and neighborhoods besets every metropolitan area."  [153•1 

p Fernbach describes the dynamic processes under way in US society and the gap between the measures which are being taken and the ever growing needs. He emphasises that already in 1960, according to the official census, almost 16 million dwelling units in the main metropolitan areas were substandard because they either were dilapidated or lacked running water or other basic plumbing facilities, and so on.  [153•2 

p Such a situation also prevails in other spheres of public services to the urban population—education, social welfare, public utilities.

p The social and geographical polarisation of the population tends to exacerbate the financial problems of urban municipalities. The poor, specifically the Negro, population, is concentrated in dilapidated houses in the old central districts of a city, while the more prosperous inhabitants move to the suburbs.

p The process of geographical disunity arising between the populations of urban centres and the suburbs is being consolidated through administrative organisation of the latter into self-administering communities, vested with the rights of urban municipalities. The fragmentation of the suburbs, which creates certain obstacles to the most rational planning and use of government resources on a metropolitan wide scale also tends to deepen social inequalities. But, as demonstrated by US realities, the capitalist economic system based on private property is becoming increasingly incapable of coping with the socio-economic problems it faces.

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Anthony Downs, a specialist on urbanisation problems, arrives at the conclusion that sooner or later Americans would face the dilemma: it was impossible to preserve individual freedom of property and control over land use and simultaneously achieve the desired results in planning the development of US cities. To think that both were possible would mean to ignore realities and present the wish for reality.  [154•1