As Gov. Jesse Ventura’s term wound to a close, he faced a last-minute request from Gov.-elect Tim Pawlenty to hold back state funds already promised to local governments.
Ventura declined, noting the transfers were approved a long time ago and that local governments made plans based on getting the funds. If the state reneged, it would throw local government finances into a muddle.
That decision was correct, but regardless, the incident illustrates a persistent and knotty problem in applied government finance. When there are different levels of government, as we have here in the United States with federal, state and local jurisdictions, where should decisions about taxing and spending be made?
There are pros and cons to nearly any specific decision within this rubric. In general, if a specific program affects or benefits a certain group, it should be funded and administered by a level of government that includes all those affected.
National defense protects all citizens and thus should be administered by the federal government and funded with federal taxes. We should not require Minnesota, California or other border states to maintain radars and jet fighters with state resources, but let interior states like South Dakota or Kentucky to get off free.
At the other extreme, only the residents of a small town, such as my hometown of Chandler, Minn., benefit from street sweeping or suffer if the streets are not swept. Chandlerites should decide how often they want their streets swept and they should pay for it.
Some philosophers cite a principle of “subsidiarity,” by which they mean that decisions should be made at the most decentralized level practical. In providing public services, history shows us that decentralized decision-making often, but not always, results in the most efficient use of resources.
But if fund-raising is at the same decentralized level as decision-making, the results frequently may appear inequitable. Historically, we funded local public services, including education, with taxes on property. Property-rich school districts thus had more resources per student than those where the value of taxable property was less relative to the student body. Alternatively, property owners in poorer districts paid higher tax rates than those in wealthier districts.
We accepted that outcome for decades. But here in Minnesota, thinking has shifted to the notion that good K-12 education should be provided to all children, regardless of how much taxable property there happens to be in any particular district. We have slowly shifted an increasing proportion of the cost of education from local districts — and from real estate taxes — to the state and thus to income and sales taxes.
Minnesota led other states in this process, but we are not alone. It is notable, however, that while citizens in many states apparently are convinced that all students within that state should get roughly commensurate shares of resources, there is little call to apply the same principle to the nation as a whole.
Mississippi, Alabama and several other states apparently are satisfied with levels of educational services that residents of Minnesota, Wisconsin or Oregon would think reprehensible. But one hears few calls to federalize education and reduce disparities between states, transferring money from relatively high-income states such as Minnesota to lower-income ones such as Mississippi.
I believe that in general terms, we have done the right thing here in Minnesota. But one has to realize that, as funding moves from one level to another, so inevitably does a great degree of control. It is no secret that school districts have more state rules to follow than when I was in school.
Some of these rules are needed and promote social aims such as meeting the needs of students with special challenges or establishing some minimum level for curricula. Inevitably, however, more resources are used complying with state requirements.
We followed a similar process with transportation. Before the automobile, roads and streets were largely local responsibilities. But with cars and taxes on gasoline, it became clear that there were economies of scale in moving tax collection for transportation to at least the state level. Cities, counties and townships continued to use some local funds for streets and roads, but increasing proportions came via a much-fought-over state formula.
Such funds allowed local government to build and maintain roads that would have been onerous if funded purely through local property taxes. But centralized finance also led to centralized control. Roads had to meet state or even federal design criteria if state or federal dollars were used, even if the county engineer or township board knew of cheaper or more effective ways to do something.
Increasing centralization of finance introduces another danger. Responsibility becomes more diffuse. It is easier for local officials to spend money if they can tell local citizens that it came from St. Paul than if it shows up on local tax statements. And citizens can get lulled into enjoying — and demanding — levels of services that they frequently are not paying for themselves.
Moreover, when the state gets into budget difficulty, as right now, it is tempting for legislators to pass the hot potato of tough spending choices to local government. Regardless of whatever commitment a legislature and governor make to local government at one point and whatever administrative decisions are based on such a commitment, any new Legislature and governor can come along and say, “Sorry, the deal’s off.”
Yes, where to tax and where to decide and administer is a knotty problem, and no, it will never go away.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.