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Competition among States and Local Governments: Efficiency and Equity in American Federalism.

This is a very important book. It is a signpost at, or more accurately, an analysis of the vital crossroads we are at in the evolvement of our American federal and intergovernmental system. Although not easy reading, the book is a must for those who shape public policy on intergovernmental relations. It should be required reading for students of government, public administration and public finance. Although most practitioners of public administration or finance will find the book tedious, they should at least read certain chapters: the introduction by Kenyon and Kincaid, "How Relevant is Competition to Government Policy-making?" by Elazar, and "The Competitive Challenge to Cooperative Federalism: A Theory of Federal Democracy" by Kincaid. The discussions offered in these chapters will help practitioners understand the intergovernmental cross currents buffeting our federal system and should enable them to cope better with these cross currents.

The book's 16 chapters are organized into an introduction and three main areas - sections that are theoretical or general in nature; that examine interstate competition and tax policy; and that consider interjurisdictional competition for economic development. A conclusion summarizes the book and points to issues that deserve further inquiry.

The introduction provides an excellent overview of the entire book and identifies alternative models of federalism. These models include: cooperative federalism, according to which federal, state and local governments share resources and seek a less competitive relationship with one another; dual federalism, which focuses on the different approaches to problems at the federal and state levels; fiscal federalism, which focuses on the nature of public goods and services, centralizing some within the federal government and decentralizing others with the states and local governments; and competitive federalism, which focuses on both horizontal competition among governmental entities and on vertical competition among the different levels of government.

In the general or theoretical chapters Elazar's chapter, "Cooperative Federalism," reviews the history and theory of cooperative federalism. Cooperative federalism is not a hierarchical model in which state and local governments are subordinate to the federal government. It is a partnership in which federal, state and local governments work together toward common ends.

In "The Competitive Challenge to Cooperative Federalsim: A Theory of Federal Democracy," Kincaid says that there must be competition between the national government and the constituent state and local governments, which in turn creates an incentive for intergovernmental cooperation. He distinguishes between "mediated" and "unmediated" competition. Mediated competition occurs through national governmental institutions which decide the winners and losers among state and local governments. Unmediated competition occurs directly in the marketplace, as state and local governments compete for business firms. Kincaid argues that cooperative federalism tends to transform unmediated competition into mediated competition, shifting the balance of power to the federal government.

In "Federal Aid to States and Localities and the Appropriate Competitive Frame-work," McGuire presents a rationale for federal aid to state (and local) governments. She says that because states rely mainly on ability to pay taxes rather than benefit, state tax and expenditure systems serve a redistributive as well as allocative purpose, and redistributive state tax policies give high-income individuals an incentive to relocate from jurisdictions with progressive tax systems. Federal grants can mitigate this destructive effect of interjurisdictional competition.

The next section discusses interstate competition and tax policy.

In "The U.S. Tax Reform Act of 1986 and State Tax Competitiveness," Tannen-wald says that the 1986 Tax Reform Act reduced the competitive standing of high-tax states and prompted them to cut top income-tax rates in 1987 and 1988. In "Interstate Competition and State Personal Income Tax Policy in the 1980s," Gold concludes that states increased their reliance on the personal income tax relative to other taxes during the 1980s.

Of the chapters on competition for economic development, the centerpiece is Netzer's "An Evaluation of Interjurisdictional Competition through Economic Development Incentives." Netzer argues that capital subsidies offered by state and local governments to business are generally not cost-effective. He says that the federal subsidy through tax-exempt bonds is cost effective for the states and localities that issue the bonds not for the nation as a whole. Netzer also points out many household relocations are in response to perceived differences in amenities among communities rather than to only economic considerations. However, although saying that public investments in education and infrastructure are beneficial, he questions whether state and local government spending for the amenities can have much impact on the rate of economic growth. In his response to Netzer, Fosler points out that state and local government expenditures make up 14 percent of GNP and that the public and private sectors are increasingly interdependent. He argues that the totality of state and local government expenditures has a profound effect on economic development.

In the concluding chapter, "Interjurisdictional Competition: Summary Perspective and Agenda for Research," Fisher uses per capita revenue, expenditure and income data to suggest that interjurisdictional competition has not reduced variation among the states in wealth, suggesting a continued important role for the federal government in income redistribution.

Available for $24.25 from the University Press of America, Inc., 4720 Boston Way, Lanham, MD 20706 (301/459-3366).
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Author:Vogt, A. John
Publication:Government Finance Review
Article Type:Book Review
Date:Apr 1, 1992
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