Financing Federal, State, and Local Governments in the 1990s

The 1980s were a decade of federal fiscal devolution. Federal cutbacks reflected the Reagan administration's commitment to decentralization and the realities of federal budget deficits. Cutbacks increased fiscal pressure on state and local governments, while restrictions on their borrowing capacity made it more difficult to use long-term tax-exempt debt to raise revenue in the short term. These restrictions also made it more difficult to finance public-private partnerships. To cope, state and local governments improved management techniques, transferred functions to the private sector and to other units of government, diversified their revenue systems, and looked for more discretionary revenue. Revenue enhancement was often limited by restrictive statutes, intergovernmental competition, and public opposition. Growing cynicism about the fairness of taxes prompted passage of the Tax Reform Act of 1986. This act significantly affected state and local taxing and borrowing. It did little, however, to allay state and local fears that the federal government would continue to capture more revenue for itself. As we enter the 1990s, the major question will undoubtedly be, Which governments can or should pay for what?