Thinking Outside the Box?
Studies in Fiscal Federalism and State–local Finance series
Edited by Sally Wallace
Chapter 1: Introduction and Overview
Sally Wallace The period since 1990 has presented a new set of challenges and opportunities for public finances in the USA. Demographic trends have put substantial pressure on non-discretionary public expenditures such as health care, legal challenges have put pressure on education financing, and aging infrastructure continues to call for more federal, state and local investment. Policy changes at the federal level such as changes in income tax policy affect states tied to the federal income tax, and revised and new mandates for issues such as water and air quality reduce state and local governments’ fiscal ‘space’. Control over many of these challenges is beyond the bailiwick of state and local governments, but dealing with their repercussions on public finances is a central job of state and local governments. Dealing with these forces has arguably become increasingly difficult due to domestic and international competition for economic development and the politics associated with holding down local taxes such as the property tax. The economic downturn of the early 2000s and the 2008 recession underscore the volatility of the economic landscape facing state and local governments. Because of the overarching landscape of pressures outside their control and difficult economic times, state and local governments are more hard-pressed than ever to find creative solutions to long-term financing issues. How can state and local governments cope? Is there room for more tax revenue at the subnational level? Do states need to reduce expenditures? Are there means of creative financing out there? These questions and...