Several years ago the mayor of a medium-sized American city identified his three major problems as "money, finances and revenues." He, like other local government officials in the United States, had limited control over his financial problems. With an improved economy in the United States today, strains on local budgets have eased somewhat. Still, there is much the states could do to help local officials cope with the financial demands on them, as well as limit their own agendas in dealing with local governments. It is a story as old as the Republic itself. What should be the powers of local and state government, particularly to raise revenue, and how independent should they be from the federal government? In the following article, David R. Berman, political science professor at Arizona State University and an expert on state and local government, explains the nature of the U.S. system, and highlights some trends. This article is adapted from his analysis of state and local government relations that first appeared in the Municipal Year Book.

When the Founding Fathers of the American Revolution met in Philadelphia in 1787 to write the U.S. Constitution, a cardinal principle on which they all agreed was that power should not be concentrated in one person, or among one group or in one place. Having suffered the effects of what they felt was arbitrary rule from a colonial power, they were intent on encasing the Republic's new form of government in a system of checks and balances to preserve the liberties of people who were now citizens and not subjects.

The division of power at the federal level between the president, Congress and the Supreme Court is the most salient example of the checks and balances in the U.S. Constitution -- but not the only one. The Founding Fathers also wanted a check and balance on the power exercised by the federal government over the states and localities. James Madison, regarded as the most important architect of the Constitution, stated it succinctly. "The powers delegated...to the federal government are few and defined." Accordingly, the Founders determined that local government in the United States should be under the control -- loosely under the control -- of the states, and not the federal government.

The U.S. government has the power to tax and spend, but so do local authorities -- under the guidance of the states -- independent of the federal government. Overseas visitors are often astounded by the myriad of issues determined at the local level in the United States, a degree of decentralization once viewed as wasteful and confusing by some, but now increasingly of interest in countries where concentration of power at the center has led to less than desirable results.

The U.S. view always has been that government is best that is closest to the people. And if, for example, Kansans want to pave their highways differently from North Carolinians, or establish a different school curriculum, the Constitution guarantees that they may do so. Indeed, most states afford their local governments considerable flexibility in maximizing local control independent of state government, let alone the federal government. This includes the raising of local revenues within certain parameters which differ widely from state to state.

Major Sources of Local Revenue

Local authorities -- mostly county and city governments -- in the United States raise over 65 percent of their own revenues, a significant portion that most would like to either maintain or increase based on the belief that locally generated revenues maximize local control. The remainder of their funding is obtained from a variety of sources, including the individual state and federal governments. Some of that assistance comes with strings attached, however.

As far as locally generated revenues are concerned, a major source of funding in almost every locality is the property tax on homes and commercial real estate. For the most part, significant property holdings, as well as income, are considered as major sources for the funding of government. Property taxes are the largest, single source of local government revenues -- at about 26 percent of their total funding. Five percent of local government revenues comes from locally adopted sales taxes (allowed by slightly more than half the states), two percent comes from an individual local income tax (allowed by a small number of states), and about 14 percent from user fees and miscellaneous charges.

States also contribute to the local revenue pot, mostly in the form of grants and through returning a portion of state tax revenues to local governments. Grants are usually designated for specific programs, such as for education or transportation, though most states also provide unrestricted grants as well. State sales, income and gasoline tax revenues are the funding sources most often shared with local governments. As is the case with grants, some of this revenue is unrestricted, and some is earmarked for specific purposes, such as highway improvements. State aid to cities generally averages about a third of all state expenditures.

Over the past two decades, user fees have been used increasingly to finance a variety of services at the local level -- everything from paying for water and sewage to funding various forms of transportation services. The trend is based on the belief that, ideally, the direct user of a service should pay for it. Even indirect users are sometimes assessed. For example, fees are often imposed on developers of residential and commercial real estate to offset the costs of building or expanding, roads, sewers and other services that facilitate their projects.

Additional revenues are earned from a variety of other sources, including locally owned enterprises, such as state-operated alcoholic beverage stores and legalized gambling operations, and the issuance of local bonds, particularly for highway projects.

Checks On Local Government

The powers granted to the states under the Constitution -- and through the states to local government -- are viewed as a check and balance on federal control. In recent years, however, voters have sought to check the power of local government as well, especially in cases where they considered that taxes were too high or the programs of municipal authorities too ambitious.

In addition to the obvious check provided by elections, voters in many cities have made use of referenda to force changes on both state and local government. Referenda, or ballot initiatives, an example of direct democracy, are in use in about half the states.

In recent decades, California voters have set the pace. In 1978, they approved Proposition 13, which capped local property tax rates and limited increases in assessed property values except when the property was sold. Through the adoption of a series of other propositions, California now requires that virtually all local revenue-raising actions (taxes, fees, charges) be approved by two-thirds or more of the voters.

Similar restrictions on the power of state and local government have been forced in other states -- not by the federal government -- but by the voters themselves. In states that do not have referenda, voters and other interested parties often work through state legislatures to enact restrictions on local governments they believe have become too powerful.

Media also act as a check on local government in the United States. Although there are a few national broadcast networks and national newspapers, most media in the U.S. is local. If local government proposes a tax increase, for example, whether considered justified or not, the local newspapers, television and radio stations will, without fail, report on it and make sure citizens are informed.

Trends in Local Government in the U.S.

Whereas there has been a trend in recent years for voters to try to restrict the powers of local government, there also has been a countervailing trend at the state and federal level toward more decentralization or devolution in asking local authorities to undertake more initiatives locally and to pick up more of the cost.

This has encouraged local governments to generate even more creative schemes for raising revenue. They include: targeted tax increases, contracting out city services and entering into partnerships with other local governments to rationalize service delivery. In most cases, states look upon the creation of such regional efforts and initiatives with favor.

While securing more revenue authority is still important to local officials, some have placed equal or even greater emphasis on reducing state mandates, that is, costly programs that state governments require local administrations to adapt without providing funding. Consequently, there is a trend toward the reduction of state mandates on local authorities.

The trend toward more decentralization is not absolute, however. Some states have assumed more responsibility, particularly for the financing of local courts and prisons, for indigent health care and certain forms of welfare assistance. Shifting financial responsibility for a program to the state provides financial relief to local governments, but the price is sometimes a loss of local control, which some jurisdictions are reluctant to accept.

The precise relationship between state and local government is clearly complex and evolving. It also is wildly diverse. In some states, local governments have much more independence from the state -- and revenue-raising authority -- than in others. There is no one pattern of local government in the United States, nor one universal relationship between a state and the local jurisdictions within it.

It also is clear that power and authority between the two levels of government often have ebbed and flowed during different periods in American history -- in response to court rulings, and to economic, social, political and technological circumstances. Some cities are wealthier than others and better able to run their own affairs. Some are more dependent on the state for assistance. The overall trend in recent years on balance is toward returning as much authority as possible to local government.

A consistent principle throughout the history of the United States, however, is that state governments -- and through them local authorities -- have separate powers under the Constitution that the federal government cannot abrogate. The principle is enshrined in the Tenth Amendment to the Constitution, which reads: "The powers not delegated to the United States (the federal government), nor prohibited by it to the states, are reserved to the states respectively, or to the people."

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Click here to look at two U.S. organizations that were formed to represent the interests of local government at the state as well as at the national level.