Our fractured fiscal system: fiscal relations between the states and federal government may be at an all-time low.

• Author: Tubbesing, Carl

Bone stress fractures are unbearably painful. Ask any basketball player who has tried to play with one. Stress on a weakened bridge truss is dangerous. Ask any civil engineer who has done the computer modeling. And the stress that has built up in fiscal relations between the states and federal government is painful to the states and dangerous to the long-term health of the federal system. Ask any appropriations chair trying to balance a state's budget.

For two decades, unfunded federal mandates have symbolized the growing fracture in state-federal fiscal relations. Most legislators can readily name the current offenders--the Individuals with Disabilities Education Act, No Child Left Behind, the Help America Vote Act and homeland security. And they are girding for the possibility of the next huge one, the Real ID act. The National Conference of State Legislatures estimates that the federal government has shifted $100 billion in costs to states over the past four fiscal years--not including the $11 billion that Real ID could cost states over the next five years.

Those numbers are staggering, but they barely begin to describe the range and magnitude of fiscal stress that has come to characterize the country's federal system. To get a sharper picture, we need to enter the green eyeshade world of grants-in-aid, block grants, categorical grants, entitlements, clawbacks and trust funds. We need to explore the fundamental effects that changes in this seemingly arcane world have on the role of the states in the federal system. Let's start with a Cliff's Notes history of 200 years worth of state-federal fiscal relations.

For most of the country's first 200 years, the federal government was fiscally weak. It didn't tax much, except in wartime, financed itself through customs revenues and land sales, and shared little, if any, of the few revenues it mustered with the states. This changed with the Great Depression of the 1930s. The national government used the income tax and deficit spending to stimulate the economy and fund the New Deal. Much of the program was administered by the states, funded by money supplied by the national government. By the end of World War II, the federal government, which had been in a fiscal slumber for almost two centuries, suddenly was dominant. In 1948, its revenues tripled those of all state and local governments combined. This dominance eased through the 1950s and 1960s. During the 1970s, 1980s and 1990s, federal...