Interstate Fiscal Disparities among American States: Its General Trend during 1970-1996 and Its Implications to the 1996 Welfare Reform

By Qiao, Yuhua | Journal of Public Budgeting, Accounting & Financial Management, Spring 2002 | Go to article overview

Interstate Fiscal Disparities among American States: Its General Trend during 1970-1996 and Its Implications to the 1996 Welfare Reform


Qiao, Yuhua, Journal of Public Budgeting, Accounting & Financial Management


ABSTRACT. This article discusses interstate fiscal disparities in the context of welfare reform. It presents the trend of interstate fiscal disparities during 19701996 and highlights the need to study how the welfare reform of 1996 affects interstate variances in welfare support.

INTRODUCTION

Oakland (1994, p. 199) defined fiscal disparities as "differences in fiscal effort required to achieve a particular fiscal outcome." The major concern about fiscal disparities is the equity issue that it raises. Citizens living in different jurisdictions receive different levels of service. Such differences are caused by various factors, including fiscal capacity, administrative efficiency, environmental cost factors such as urbanization, and population characteristics (Bahl, Martinez-Vazouez, and Sjoquist, 1992) and political culture of jurisdictions (Miller, 1991). While diversity of public services can promote the responsiveness of the political systems to local needs as public choice theory argues, severe fiscal disparities in public services renders the public finance system unfair.

Though numerous studies on inter-jurisdictional fiscal disparities have been conducted, a majority of them discussed fiscal disparity in local education finance or between central cities and suburbs (Campbell, 1992; Bahl, Martinez-Vazouez & Sjoquist, 1992). The lack of interest in fiscal disparities at the state level is due to the perception that fiscal disparities at the local level are far more severe than disparities among the states (U.S. Department of Treasury, 1996). Yet, this does not dismiss the necessity of studying fiscal disparities at the state level. The fact that the state governments have assumed more and more domestic responsibilities since the early 1980s means that interstate fiscal disparities could affect the welfare of citizens even more than before (Fisher, 1995).

A discussion of this topic is particularly necessary in light of welfare reform. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 replaced the Aid to Families with Dependent Children (AFDC) with the Temporary Assistance to Needy Families (TANF), giving state governments more authority in using federal funds and in administering the nation's cash assistance program. As Cashin (1999, p. 552) argues that "the political economy of state decisionmaking is more hostile to redistributive aims than is that of national decisionmaking," there is a need to watch closely how this devolution effort affects the service levels for the poor in different states.

This article discusses interstate fiscal disparities in the context of welfare reform. After examining the trend of interstate fiscal disparities from 1970-1996, the author presents the interstate welfare expenditure variations based on the preliminary data of 1997-1999 and urges additional studies be conducted. This paper has five sections. The first section reviews the latest devolution effort that gives states more autonomy in the area of welfare policy and the concerns that arise from this devolution from a fiscal federalism perspective. The second section explains the method used in this study to examine the trend of interstate fiscal disparities. The third section presents results of interstate fiscal disparities during 1970-1996. The fourth examines interstate welfare expenditure variation based on the preliminary data of 1997-1999. The conclusion section highlights the need to study interstate service disparities under the current welfare reform.

DEVOLUTION OF PUBLIC WELFARE

When the United States was founded, a great many responsibilities were retained by the states and their local governments. However, in the late 1930s, power, responsibilities, and fiscal strength shifted towards Washington (Kee & Shannon, 1992). The trend was reversed beginning in the late 1970s when there was an overwhelming public belief that the federal government had become too big and intrusive (Shannon, 1990; Swarts & Peck, 1990). …

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