The Future of American Federalism

Federal government transfers provide 36% of current state revenues. This share has increased by 50% over the last 40 years and by much more over the last 100 years. Given (1) the borrowing headwinds the federal government faces, (2) the risk of a sovereign debt crisis, and (3) the potential for a global war with China over Taiwan and the consequent determination of the future international order, state governments cannot continue to rely on federal spending to bail them out of recessions, let alone to cover ongoing operating costs. A greater separation of intergovernmental fiscal dependencies would put each level of government in a better position to address their core responsibilities.