Fiscal Federalism Spending and Taxes Essay

Excerpt from Essay :

Foremost, when they occur, they generate massive financial setbacks for the institution implementing them as they generally require a large sum of money. "It is difficult to properly handle investments in public budgets. The rewards are spread out over an extended period of time while the cost or the pain of investing is immediate. That makes if difficult to finance public investments" (Penner, 2008).

For the state and local governments to be able to fund their investments, they should organize their incomes into two categories: current operating capital and capital component. A simple accounting method would help them benefit immediately from the investment. In this order of ideas, given that the investment is amortized and the amortization is registered as part of operating expenses, the users of the investments would immediately benefit from it, and also pay it at the same time (Penner, 2008).

Another means to deal with the upcoming investments or the financial coverage of other needs likely to emerge should revolve around the constitution of rainy days funds. These would allow each state institution to govern itself in an efficient manner and are even more so worthy as they have saved several state institutions throughout the 2001 economic recession (Ruben, McGuire and Kellam, 2007). They are also referred to as budget stabilization and are constituted from funds which "allow states to set aside excess revenue for use in times of unexpected revenue shortfall of budget deficit" (Rueben and Rosenberg, 2008). The amount of rainy day funds each institution allocates depends on various features. In 2007 for instance, rainy day funds accounted for 1% of all institutional funds in Michigan and Wisconsin, 20% in North Dakota and 50% in Alaska. The other states found their rainy day funds somewhere between the extremes of 1% and 50% of total funds.

Unconditioned aid systems should not be implemented in order to stimulate state and local institutions to govern themselves with the taxes collected throughout a fiscal year. If the government constantly steps in and resolves the financial shortages of a state organization, that respective institution will never learn how to properly administrate their funds, assets and debts.

Then, there is the matter of paying back. However it cannot be generalized that state institutions do not timely and efficiently pay their debts, there were several situations when this occurred. Otherwise put, if they were to offer unconditional aid systems, federal and state institutions would face the risk of not being able to recuperate their money in time. This means that they would be unable to finance further investments of social, economic, technological, environmental or political improvements. The delay in these investments would materialize in citizens' dissatisfaction.

Not allowing unconditional aid systems can also be regarded as a means of improving the living standards of the populations in the respective communities. This is basically achieved through an institutional need to attract more funds. Most funds are retrieved through taxes, but since increasing the tax rates is not the most desirable solution, state and local institutions would focus on creating more development opportunities, which generate more taxable incomes. Therefore, these measures, supported by not allowing unconditional aid systems will stimulate investors to operate in the desirable areas, will create more jobs and will increase the population's wages.


The unconditional aid system, or General Revenue Sharing is a system implemented by President Richard Nixon in 1972 and it is based on the idea that all state institutions should have easy access to funds. However the plan was well received at the time, today it has lost its popularity. Proof of this stands the fact that the federal government has refused its implementation and state governments only limitedly use it.


Penner, R.G., June 10, 2008, Budgeting for Capital Investment, Statement before the House of Representatives Committee on Transportation and Infrastructure

Rueben, K., McGuire, T., Kellam, S., October 2007, Navigating State and Local Finances, Lincoln Institute of Land Policy

Rueben, K., Rosenberg, C., April 28, 2008, State and Local Tax Policy: What are rainy day funds and how do they work? Tax Policy Center

Woolley, J., Peters, G., 1999, Richard Nixon, the American Presidency Project, accessed on November 14, 2008

2006, Revenue Sharing, Gerald R. Ford Presidential Library…

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