Vertical Fiscal Balance and Horizontal Fiscal Diversity in the U.S. Federal System: What Might Common Shared Taxes do?

Abstract

}The American federal system shows substantial vertical fiscal balance: the level of government that spends closely corresponds to the level that raises revenue to finance that expenditure. This responsibility allows state-local governments great freedom in regard to the size of their public sectors relative to their state economic base, in how they arrange revenue structures to distribute the cost of their public programs through their economies, and in how they allocate their public budgets across service categories. This freedom results in great horizontal diversity in both expenditure and revenue choices. Revenue decisions are somewhat more diverse than expenditure allocations. If a considerably expanded federal tax sharing program were adopted, as some have proposed, vertical balance would decline somewhat and, most likely, so would the regional diversity that characterizes the American system.