New Federalism: Impact on State and Local Governments
Anders, Kathleen K., Shook, Curtis A., Journal of Public Budgeting, Accounting & Financial Management
ABSTRACT. This paper explores the changing nature of federalism in the United States. While the paper highlights different phases of federalism and its impact on sub-national governance, the focus is on "New Federalism" a reform initiative begun in the 1970s that emphasizes decentralization from the national to state and local governments. Today, federal programs and funding are transferred to the states; however, these program responsibilities are then devolved from state to local governments. This creates tension across governments in a good economy; however, it can be a formula for disaster in times of severe budget shortfalls. The argument is made that, though devolution is largely a positive development, collaboration among interdependent national and sub-national governments needs to be advanced.
This paper explores the changing nature of federalism in the United States by tracing its evolution from its roots in the Constitutional Convention to its current stage. While the paper highlights different phases of federalism and its impact on sub-national governance, the focus is on "New Federalism" a reform initiative that describes federalism since the 1970s and emphasizes decentralization from the national to state and local governments.
New Federalism was introduced by President Richard Nixon as a reform of the "old" federal system represented in the Great Society programs of the 1960s. His prescription for federalism reform was to decentralize national programs and restructure the roles and responsibilities of governments at all levels. Nixon sought to simplify intergovernmental relations by providing funds to general levels of government through block grants and general revenue sharing. Spending now would be funded by the federal government but controlled at lower levels.
In the 1980s, the Reagan administration viewed New Federalism as part of a broader strategy to reduce the role of government at all levels. Like Nixon, Reagan wanted to reverse the centralization of power in Washington and to bring government closer to the people. Yet, he also wanted to minimize government's interference in people's lives and roll back the modern welfare state.
In the 1990s, the size of the national government with its burgeoning deficit brought about renewed promises to streamline the federal bureaucracy and devolve power and decision making to state and local governments. Federal spending was to be cut and capped and New Federalism, as outlined by a Republican Congress in its Contract with America, would include concomitant reductions in federal spending and taxes. President Clinton agreed in principle to a balanced federal budget as well as devolution even though he disagreed in degree and tactics. His administration would emphasize "reinvention" as a means to improve government performance and intergovernmental relations.
Newly elected President George W. Bush felt that "the [budget] surplus is not the government's money" but "the people's money" and had as a first order of business for his administration legislation to cut taxes (Bush, 2000). Now facing a return of federal deficits, the President maintains that that tax cuts are again needed to strengthen the economy (Bush, 2003). Although winning passage of only $330 billion in tax reductions, or half of the amount requested, such tax relief, coupled with the shift in balance toward self-funded state and local spending, may exacerbate spending pressures and budget gaps facing state and local governments.
Currently, federalism is advancing toward decentralization, characterized as a "second order devolution." Under second order devolution, federal programs and funding are transferred to the states; however, these program responsibilities are then devolved from state to local governments. Further complicating this new federal design is decreasing public confidence in government coupled with a decade long economic expansion that has prompted not only the federal government but also state governments to cut taxes and increase unfunded mandates. …