Urban Fiscal Policy
This article will focus on urban fiscal policy in the United States. The history of fiscal policy, including discussions of economic depression, contraction, expansion, and taxation, will be introduced as a foundation for an analysis of the issues surrounding budget deficits and fiscal crises in urban regions in the United States. In addition, this article will analyze how federal and local revenues are raised, how fiscal revenues are spent, and describe how the federal government affects the finances of local governments.
Keywords Deficit; Depression; Economic Contraction; Economic Expansion; Federal Government; Fiscal Policy; Recession; Taxation; Urban Fiscal Policy
The economic goals of the United States government include maintaining high levels of employment, establishing stable prices for goods and services, and controlling the pace of economic activity. The United States government uses the tools of fiscal policy and monetary policy to achieve those goals. Fiscal policy refers to expenditures by federal, state, and local governments and to the taxes levied to finance these expenditures. Fiscal policy supports and funds the federal budget, aids the federal government's social policies, and promotes overall economic growth and stability. Federal spending includes contracts, grants, loans, and direct payments such as Social Security.
Federal fiscal policy is created annually in collaboration between the president and Congress. The president proposes a budget, otherwise known as a spending plan, to Congress in February, and Congress spends approximately six to eight months engaged in the following decision-making process:
- Congress decides the overall level of spending and taxes;
- Congress divides that overall budget amount into separate categories such as national defense, health and human services, and transportation; and
- Congress creates individual appropriations bills that detail how the funds in each category will be spent.
The federal government depends on taxes to cover almost half of the expenses included in the federal budget. The main income generating taxes are income tax, payroll tax, and tax on corporate profits. Common debates in American government and society about income tax include issues such as the appropriate overall level of taxation and the extent to which taxes should be used to promote social objectives. State and local governments collect the majority of their tax revenue from property taxes.
The federal government is fiscally responsible to all of the states and regions in the country. That said, states and regions do not receive equal grants and aid from the federal government. Economic research demonstrates that the allocation and distribution of federal funds does not create fiscal equalization across American cities. For example, “the intraregional distribution patterns of federal expenditures across Southern Californian cities (as reported in the Consolidated Federal Funds Reports data from fiscal years 1983 to 1996) suggest that while poorer cities receive more money from anti-poverty funds, they receive less from other fiscal funds intended for maintenance and improvement to physical infrastructure” (Joassart-Marcelli, 2001, abstract).
Cities and urban regions in the United States are a unique category and concern for fiscal policy makers. Urban fiscal policy, negotiated and carried out at the federal, state, and local levels, affects the ability of cities to meet the economic and social needs of diverse resident and business populations. Urban fiscal policy refers to a variety of tax, budget, financial, and similar public policy issues that influence the features of life and the economic success of people in cities. Areas of concern and influence for urban fiscal policy makers are comprised of the inducements and ramifications of urban fiscal catastrophe, the design of preferable tax and expenditure procedures for local governments, and the capital behind public foundations. The goal of urban fiscal policy is a strong urban economy and a thriving populous.
The history and theory of federal fiscal policy and regional fiscal policy, with a focus on urban concerns, will be discussed in the following sections. This discussion will provide an overview of the economic environment in the federal and state governments and serve as foundation for a later analysis of the issues surrounding budget deficits and fiscal crises in urban regions of the United States.
History of Federal Fiscal Policy
The history of the U.S. economy is full of economic expansion and economic contraction. Following the American Revolution, the individual economies of the states were faltering, paper money had little value, and there was conflict between borrowers and lenders. The original thirteen states came together to draft the U.S. Constitution in part to stabilize and strengthen the U.S. economy.
From the Civil War through the beginning of the Industrial Revolution, the U.S. economy was characterized by cycles of growing and contracting. Periods of economic expansion and economic contraction averaged approximately two years. By 1920, the U.S. had begun mass production of standardized goods in factories and the practice of commercial advertising on the radio. The development of commercial radio meant that companies could promote their products and services to a larger audience of potential consumers than ever before. Post-1920, periods of economic expansion lasted three to four years followed by shorter periods of economic contraction of approximately one year (Conte, 2001).
The Great Depression, the severe international economic recession of the 1930s, was caused in the United States by instability of the economy created, in part, by new mass manufacturing processes, uneven distribution of wealth and profits, and the government's investment in new industries rather than agriculture. The effects of the Depression were lessened after President Franklin D. Roosevelt took office in 1933. Roosevelt's New Deal campaign outlawed gold coins, set farm quotas, and established government work programs to generate confidence and money in the U.S. economy.
In the 1930s, the United States government began a program and approach of mixed fiscal and monetary policies in an effort to produce sustained economic growth and stable prices (for goods, services, and natural resources). The government, with a strong record in controlling cycles of expansion and contraction during the latter half of the twentieth century, has remained periodically challenged by inflation and the related problems of unemployment, including the Great Recession of 2007 to 2009.
The government, including budgets and regulatory agencies, has grown steadily since the 1930s. In 1930, the federal government accounted for 3.3 percent of the nation's gross domestic product (GDP) while in 1999, federal government spending accounted for 21 percent of the nation's gross domestic product (Conte, 2001). As a result of the Great Recession, that number had risen to nearly 26 percent by 2010, before falling to approximately 24 percent of the national GDP in 2012 (Blodget, 2012).
History of State
Congress established the modern system of grants-in-aid to support state and local governments in the early twentieth century. The Weeks Act of 1911 (authorizing the secretary of Agriculture to cooperate with any state, when requested to do so, to protect the forested watersheds of navigable streams from fire) and the Smith-Lever Act of 1914 (distributing millions of dollars in agricultural grants-in-aid to states) established a pattern of sustained and reliable Congressional fiscal support for state and local governments (Canada, 2003).
Grants-in-aid refer to the federal funds appropriated by Congress for distribution to state and local governments. Congress awards four kinds of fiscal grants:
- Categorical grants: Federal funds that can only be used by states for a pre-determined purpose.
- Block grants: Federal funds given automatically to state and communities to support community development and social services programs and needs.
- Project grants: Federal funds awarded on the basis of the merits and strengths of an application.
- Formula grants: Federal funds awarded based on a set legislative or regulatory formula.
The funds for state and local budgets come from federal grants, as described above, as well as indirect taxes and personal income taxes. Trends in government grants to state and local governments have followed social and public policy interests since the late twentieth century. State and local spending...
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