ABSTRACT
Serious financial challenges loom over all governments, stemming from the aging of the population, slowing of economic growth, and continuing escalation of health care costs. These shifts threaten to erode the fiscal foundations that have underwritten cooperative federalism in the past and enabled governmental partners to work together in providing public services to meet rising expectations. The fiscal future of the American federal system could feature heightened intergovernmental conflict where all levels of government vie to preempt revenues, transfer costs, and shift blame for the difficult choices that will be necessary to resolve deficits. The shifting and volatile fiscal fortunes of the federal system reflect the weak institutionalization of intergovernmental fiscal collaboration at the national level. Fundamental political incentives for bargaining and collaboration across levels of government collapsed in the wake of nationalization of political parties and centralization of media and interest groups. Situational federalism arose, where federal officials displayed an ephemeral interest in intergovernmental partnerships. For instance, a near record federal stimulus that modeled the best thinking in public finance was quickly followed by federal indifference and passivity in the face of major fiscal pressures experienced by many subnational governments. The architects of federal tax reform are unaware of or indifferent to the possible impacts on state and local governments. The question facing the United States is whether its weak collaborative institutions and incentives can be stepped-up to fashion truly intergovernmental fiscal solutions to long-term fiscal challenges that pervade public finances at all levels of government.
