first lien on property tax revenue growth within the TIF district boundary. Given this legal claim on revenue growth, a conflict is created in the event a fiscal equalization scheme is developed that also claims growth in tax revenues. In addition, how will other nonmunicipal governments be treated under proposed fiscal equalization plans? What about schools and special districts? These questions illustrate the broader issue of what to do about the structure of overlapping taxing jurisdictions.
How can fiscal equalization be implemented in a metropolitan region? What institutional channels should be the forum for designing and establishing fiscal equalization? Should existing organizations take the lead in promoting fiscal equalization? Should a new vehicle be created specifically to champion the most desirable programs? Once established, how should these organizations proceed? To answer these questions, various organizational means might be used, including nonpartisan public citizens groups, area elected officials, a special district format, working groups and task forces, or technical advisory groups.
Baker, K., S. Hinze, and N. Manzi, 1991. Minnesota's Fiscal disparities Program. Minneapolis: Research Department, Minnesota House of Representatives. July.
Bowman, J. H., S. MacManus, and J. L. Mikesell, 1992. "Mobilizing Resources for Public Services: Financing Urban Governments." Journal of Urban Affairs, vol. 14, no. 3-4:3110- 335.
City of Louisville, 1985. Louisville-Jefferson County Compact. Louisville, KY: City of Louisville, Department of Law.
Hackensack Meadowlands Development Commission (HMDC), 1972. Intermunicipal Tax Sharing Theory and Operation. Hackensack, NJ: HMDC, October.
Ladd, H. E., and J. Yinger, 1989. America's Ailing Cities: Fiscal Health and the Design of Urban Policy. Baltimore, MD: Johns Hopkins Press.
Lee, R. D., Jr., and R. W. Johnson, 1994. Public Budgeting Systems. 5th ed. Gaithersburg, MD: Aspen Publishers.
Pammer, W., and J. Dustin, 1993. "Fostering Economic Development Through County Tax Sharing". State and Local Government Review. (Winter): 57-71.
Wolman, H., R. Hanson, E. Hill, M. Howland, and L. Ledebur, 1992. "National Urban Economic Development Policy." Journal of Urban Affairs, vol. 14, no. 3-4:217-238.
FISCAL FEDERALISM . A subfield of economic theory, concerned with the distribution of governmental responsibility between levels of government, and, more generally, an area of research and scholarship concerned with the financial aspects of intergovernmental relations in a federal system.
Important features of a federal system can be captured through legal and political analysis, but economic models of governmental activity are especially useful for understanding intergovernmental relationships and for exploring the effects that these relationships have on public policies. Through economic analysis of grants-in-aid and other exchanges of economic resources among governments, it is possible to test carefully specified models of the intergovernmental system.
Investigators who approach federalism from a "fiscal federalism" perspective suggest that the decentralization that characterizes federal systems is at least in part an economically rational effort to improve resource allocation in the public sector by recognizing variations in local taste. Many of the exchanges in which students of federalism are interested exist to compensate for externalities ("spillover" effects) of programs produced by constituent states. Goods and services that states produce serve not only the population of the individual states but also some living in other states as well, people who are not paying taxes to receive those benefits. In such circumstances, then, grants-in-aid are appropriate to compensate for spillovers.
Negative spillovers may also call for grants, as when cities find it cheaper to dispose of raw sewerage into a stream rather than to treat it first. Fiscal federalism advocates would suggest that grants for sewage treatment plants (or for downstream communities' water treatment plants) would be appropriate.
Students of fiscal federalism have focused attention sharply upon the effect that various types of intergovernmental fiscal exchanges have upon the economic behavior of governmental decisionmakers. Lump sum grants, categorical matching grants, and general revenue sharing have been examined. In addition to grants-in-aid, other types of subsidy can flow from one level to another, such as provisions of the tax code allowing deductibility of state and local taxes and interest on federal income tax returns. Most recently, attention has turned to the imposition of costs on constituent units of the federal system through the regulatory process, the imposition of unfunded mandates with which constituent units must comply at their own expense.
In the period since World War II, there are few more important developments in the United States political system than the many changes in fiscal federalism that have led to its emergence in its present form. In 1955, federal grants-in-aid accounted for only 10.2 percent of total state and local outlays and only 0.8 percent of gross domestic product (GDP). Even though grants-in-aid, as they are known, had been in use for over 40 years and had been of increasing importance since the Great Depression years, state and local governments were not, for the most part, looking to Washington for financial assistance.
That was soon to change. Beginning in the late 1950sparticularly with the advent of the interstate highway program-and continuing in the 1960s with federal aid