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Published in Harvard law review, v. 118, no. 8, June 2005, p. 2544-2652.


Although interactions between federal and state taxes and spending programs are becoming increasingly controversial, this Article asserts that major theories of federalism built to divide regulatory authority between the two levels of government poorly account for the quite different problems of fiscal cooperation and competition. The Article therefore identifies and distinguishes three justifications for federal funding of states’ operations: In some programs, funding seeks to insulate states from particular fiscal burdens, such as the side effects of federal policies or the abrupt termination of federal responsibility for particular problems. In other programs, funding provides an incentive for states to follow federal policy leadership. And in still others, the federal government assumes financial responsibility because of its superior fiscal capacity. The Article finds recent congressional action on unfunded mandates and the Court’s new federalism jurisprudence lacking coherent justification under these three models. The Article then turns to programs that aid low-income people, which present excellent examples of spending programs that suffer from design defects because of the current lack of a coherent theory of fiscal federalism. For example, the Article finds states’ fiscal constitutions mired in pre-Keynesian economics. As a result, states consistently undercut federal macroeconomic policy, stimulating the economy during expansions and deflating it further during downturns. In addition, the Article identifies powerful but poorly understood features of state fiscal constitutions that systematically privilege low-income people. Accordingly, this Article criticizes recent moves to devolve fiscal responsibility for precisely the kinds of functions that states are least able to perform. The Article urges states to update their fiscal constitutions to eliminate chaotic responses to swings of the business cycle and to equip themselves to perform the tasks being assigned to them. It also recommends that the federal government adjust its fiscal relationship with states to account for these limitations.