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4 National-Urban Relations in Foreign Federal Systems: Lessons for the United States Harold L Wolman INTRODUCTION This paper examines the nature of the relationship between national governments and large urban governments in countries with political structures relatively simi- lar to that of the United States. The United States has always viewed itself as a unique country with distinct problems and solutions. Yet the economic transformation the advanced Western nations appear to be undergoing has created similar problems for all of them, not the least in terms of its impact on their urban areas. Thus, the Organisation for Economic Co-operation and Development (OECD) in its report, Managing Urban Change, cited a list of problems affecting urban areas in the more advanced OECD countries that would seem quite familiar to most Americans. The OECD (1983a:50) made the follow- ing observation: Many cities of the OECD countries are exhibiting social and economic problems of concern to policy- makers which, when concentrated in certain areas, are indicative of urban decline. Symptoms are evident in the daily experience of their inhabi- tants and in the newspaper headlines and evening television programs: · high levels of unemployment, low paid or irreg- ular employment, closure of factories, shops and offices; · deteriorating housing conditions, the physical decay of the built environment and infrastruc- ture, vacant land and abandoned buildings; 91
92 · severe social problems including low educa- tional achievement, isolated elderly people, single parent families, poverty and hopelessness; · concentrations of ethnic minorities, often en- countering discrimination in finding homes and work; · crime and vandalism, the occasional outbreak of riots, and a general breakdown of law and order. The economic forces underlying these problems appear to be nearly universal (see Table 4-1). TABLE 4-1 National Employment by Industrial Sector (percentage) Manufacturing 1973 1982 Services 1973 1982 Australia 23.9% 18.8% 49.5% 56.1% Austria 35.7 31.0 43.5 49.1 Belgium 31.8 24.1 Canada 22.4 18.2 43.8 49.2 France 27.9a 24.7a 45.0 50.5 Japan 27.4 24.5 42.7 49.0 Netherlands 25.Ql 20.5a 53.3 60.0 New Zealand 25.0 24.0C 44.3 47. Norway 23.5 19.7 44.8 52.9 Sweden 27.4 22.4 49.5 57.0 Switzerland 35.0 32.~ 42.4 47.3b United Kingdom 32.2 25.4 48.0 56.3 United States 24.8 20.4 43.8 47.6 West Germany 36.4 35.0b 39.1 43.2 NOTE: ~Manufacturing. excludes construction. ~Ser- vices. include trade, restaurants, and hotels; finance, insurance, and real estate; and community social and personal services. al975 data. b~g80 data. C]981 data. SOURCE: International Labor Organization (1983) Yearbook of Labor Statistics.
93 Western economies are transforming from specialization in routine manufacturing processes to more complex manufacturing and advanced services economies. In all of the more advanced OECD countries, manufac- turing employment is declining as a percentage of total employment and service employment is increasing; this ~ the major urban Manufacturing jobs no longer are sufficient to employ the lower skilled labor force that tends to be concentrated disproportion- ately in central city areas. The OECD (1983a:62) con- cludes that The consequences for the remaining inner city residents may be prolonged unemployment or irreg- ular and low paid employment.. The similarity of problems suggests that there may be something to be learned from examining the relationship of national government to urban government and the prob- lems of urban areas in these countries. However, given the distinctive structure of the American political sys- tem and the inevitable difficulties of interpreting the meaning of experience grounded in a specific foreign context, it is desirable to limit the comparison to those systems most similar to the U.S. system. Since the United States is a federal political system, the temptation to simply compare national-urban relations in other federal systems is strong. Before acceding to this temptation, however' some further consideration is in order. Although scholars have disagreed quite substantially on the proper defini- tion of federalism, nearly every definition assumes the existence of a regional level of government interposed between national and local governments, with the re- gional government having at least some spheres of activity in which it is able to make final decisions (i.e., it is not merely an administrative unit of cen- tral government). Thus, Riker (1975:101) defines fed- eralism as: process is occurring more rapidly in areas than in the nation as a whole. · _ ~ A political organization in which the activities of government are divided between regional gov- ernments and a central government in such a way that each kind of government has some activities on which it makes final decisions. The United States, Australia, Canada, Germany, Aus- tria, and Switzerland all meet this definition, for all have regional (state, provincial, etc.) bodies of gov- ernment that have power to make final decisions in some
94 spheres. Accordingly, all of those countries are in- cluded in this comparison. But our concern is with national-urban relations. Does the nonexistence of an intermediate-level regional government in many countries inevitably render the experience of those nations irrel- evant to the United States? In the United Kingdom, a country in which the sub- stance of urban problems is close to our own, the cen- tral government conducts relations with local govern- ments, which have the ability to make final decisions about important issues of urban policy. Central govern- ment relations with local authorities are direct, be- cause an intermediate government layer does not exist. However, in the United States, where an intermediate layer (states) does exist, the federal government also conducts some relations directly with city governments. As defined by Richard Bird (1980:12): Systems in which there is some degree of autono- mous decision making at different levels . . . are considered to be federal systems. The es- sence of federalism in this perspective is thus not the extent to which the rights of subnational governments are, in some sense, constitutionally entrenched. Rather, it is that local or state governments, are, in some relevant fashion, ef- fective decision-making bodies. Bird's argument is persuasive,-at least with respect to the purpose of this study, which is to examine national- urban relationships. Accordingly, while accepting as federal the six major systems with intermediate levels of government cited above, I have also included the United Kingdom as a relevant nation for this analysis. Choosing to focus primarily on federal systems, even given this expanded definition, does have some conse- quences. First, the urban problems identified earlier are not as dramatic or as advanced in some of the coun- tries, in particular, Canada and Australia, as they are in others, in particular the Federal Republic of Ger- many, the United Kingdom, and the United States* (see Table 4-2). Other countries with urban problems similar *Thus, large Canadian urban areas actually gained em- ployment in the manufacturing sector between 1971 and
95 to those of the United States, i.e., the Netherlands, Belgium, and Sweden, are not included. In addition, Austria has few large cities other than Vienna, which is both a city and a state, and Australia's local govern- ments perform few important functions. However, these variations in country circumstances and structure can be viewed as strengths of the analyses rather than as weak- nesses, for they provide an additional range of experi- ence and practice. OVERVIEW OF POLITICAL SYSTEMS With the exception of the United Kingdom, all of the countries under consideration are federal in terms of Riker's definition, in that they they have regional levels of government that possess policymaking rather than solely administrative responsibilities.* As with the U.S. Constitution, the Australian, Austrian, Swiss, and German constitutions enumerate the powers of the federal government and leave residual powers to the states. The Canadian constitution, on the other hand, leaves residual powers to the federal government. The United Kingdom is, by contrast, a unitary state in which all powers reside with the central government. The German and Austrian federal systems differ mark- edly from the others in that they divide governing func- tions as well as powers among levels of government. Thus, as Bernd Reissert (1980a:50) explains with respect to the German system: In general, responsibilities are divided not by policy areas but by functions in the policymaking process. On the one hand, the bulk of legisla- tive powers, except in the field of education, lies with the federation, and the federation is 1980, while Australian urban areas remained relatively stable. However, losses in urban manufacturing employ- ment were substantial in Germany' the United Kingdom, and Switzerland (see Table 4-2). *States in Australia, provinces in Canada, lands in Aus- tria and the Federal Republic of Germany, and Cantons in Switzerland. These regional levels of government are referred to as states throughout the discussion. ^
96 TABLE 4-2 Urban Employment and Population Change Percent Percent Change, Change, Percent Total Manufacturing Change, Unit Period EmPloYment Employment PoPulation Australia Brisbane M 1971-76 14.1% 1. 7% 27. 5% Austria Vienna M 1971-81 NA NA - 3. 2 Linz M 1971-81 NA NA 10. 7 Canada Montreal M 1971-80 3.9 6.9 21.4 Toronto M 1971-80 15.7 22.3 6.7 Vancouver M 1971-80 0.1 1.7 7.8 Switzerland Zurich M 1970-75 5.2 -15.3 -2.8 C 1970-75 3.4 -17.2 -13.1 Basel M 1970-75 8.9 1.0 - 5.1 C 1970-75 6.5 - 0.8 -15.4 Gene~ra M 1970-75 6.4 - 5.4 2.6 C 1970-75 2.8 -13. 9 -11.3 United Ringdom London M 1975-77 - 3. 5 - 1.5 -10.1 C 1968-76 -24.8 NA -17. 7 Manchester M 1975-77 - 6.8 - 4.2 - 4.9 C NA NA -17. 4 Liverpool M 1975-77 - 4.6 - 6.8 - 8.7 C 1972-80 -19.4 NA -16.4 ) Baltimore M 1970-80 18.3 -18.0 5.0 C NA NA -13.1) Chicago M 1970-80 9.6 -12.4 1.8 C NA NA -10. 8 Detroit M 1972-80 6.7 -12. 1 - 1.8 C NA NA -20. 5 West Germany Munich M 1970-78 3.0 - 8.8 11.6 C 1970-78 NA NA 0.2 Bamburg M 1970-78 - 4.6 -16. 6 0.8 C 1970-78 NA NA - 7.2 Duisberg M 1970-78 - 8.9 - 8.1 - 8.1 C 1970-78 NA NA - 9. 6 NOTE: Figures on percentage change in population are for 1970-1980 for Switzerland; for 1971-1980, for United Kingdom; and for 1970-1980, for United States. C ~ Central city. M ~ Metropolitan area. NA ~ Not available. SOURCE: Organisation for Economic Co-operation and Development.
97 also responsible for most tax legislation and for the allocation of taxes among different tiers of government. State governments, however, have a voice in the framing of federal legislation via the Bundesrat (upper house of parliament), where all federal laws affecting the interests of the states require the approval of a majority of state government votes. On the other hand, policy implementation and spending are the domain of the states and local government because the federation does not have an administration of its own to administer federal laws. Under the con- stitution only foreign policy, the federal fi- nances, the federal railways, the federal postal service, the federal waterways, and the federal armed forces are subject to direct federal admin- istration. In all other policy areas, there are no federal field agencies and all nonlegislative functions are carried out by the states and local government employing their own financial re- sources, with the federal government having no further say in the matter. In all but one of the countries being examined, local governments, as in the United States, are the creatures of the state (intermediate) level of government; the one exception is, again, the United Kingdom, where local governments are creatures of the central government. However, in Germany and Austria local governments have constitutional recognition--that is, they are provided with specific powers and standing by virtue of the fed- eral constitution. In both countries local authorities are given the power to deal with all matters of a purely local nature not circumscribed by federal or state law. By contrast, in Australia, local governments may do only what they are expressly permitted to do by state author- ity, the same situation that exists in the United King- dom with respect to central-local relations. Local governmental systems vary considerably among the countries. Australia and Canada look much like the United States in terms of their mixture of overlapping general-purpose authorities and special districts, while Germany, Austria, and Switzerland have more orderly systems of local government. However, both Austria and Germany also have city-states, a structural arrangement that has, from time to time, been suggested for large
98 U.S. cities, but never implemented. Vienna, the only large urban area in Austria, functions as both a city and a state, and, in Germany, Hamburg, Bremen, and Berlin are city-states. These cities are thus treated constitutionally and legislatively as states as well as cities, and they perform state functions and receive state tax-sharing and grant-equalization payments not available to other cities. In both countries the city- state arrangement appears to result from a continuation of historic arrangements rather than from any well- thoughtout, recent determination to treat these cities differently. Local governments play an important role in service delivery in all of these countries with the exception of Australia, where many of what are normally considered local functions are performed by the state. The weak role of Australian localities is reflected in Table 4-3, which sets forth local government expenditures as a percentage of total public sector general government expenditure. Australian localities accounted for only 6.8 percent of total general government expenditure, while localities in the other countries accounted for 20 percent or more. TABLE 4-3 Local Government Expenditure as a Percentage of General Government Expenditure (1979) Country Percentage . Australia Austria Canada Switzerland United Kingdom United States West Germany 6.8 20.0 22.4 23.6 29.2 25.1 18.0 SOURCE: organization for Economic Co-operation and Development (1983a); plus data from the United States and United Kingdom derived by author.
99 NATIONAL-URBAN RELATIONS With the exception of the United Kingdom, direct national-local relations of the sort that are prevalent in the United States are rare; the federal government interacts with urban governments primarily through state governments. The constitutional division of powers is between federal and state governments (although, as noted, in Austria and Germany local authorities are constitutionally given responsibility for ~local. mat- ters). Relationships Through the Grant System In Australia, Austria, and Germany some federal taxes are shared automatically with local as well as state governments. Tax-sharing relationships involve guaran- teed transfers rather than sustained national-local relationships; there is no national effort to influence local government policy or activity. The provision of general grants also represents, in formal terms, a financial transfer with no attempt to affect local government activity (except spending lev- els). Direct general grants from national to local gov- ernments, such as the U.S. revenue sharing program, occur only in the United Kingdom. However, in Germany, Australia, and Austria, the federal government requires that state governments distribute some of their tax revenue in the form of grants to local authorities. In the United Kingdom the Thatcher government has struc- tured its general grant system to include incentives to reduce local authority spending from local sources. Specific or conditional grants represent a more activist national government role. In Australia, Canada, Austria, and the United Kingdom, some special- purpose grants are made directly from the national gov- ernment to local authorities, although not nearly to the extent as in the United States. In Germany and Switzer- land all federal grants must be made to the state rather than local governments. Mandates In the United Kingdom, central government may di
100 rectly legislate with respect to the nature and level of services that local government provides. In essence, the same situation exists in Germany and Austria, where local autonomy is guaranteed, except where federal in- terest is concerned. In the United States, federal di- rection of local activity occurs primarily through the use of conditions attached to the ~voluntary. receipt of federal grants. This method is not utilized substan- tially in any of the countries examined, although the attachment of conditions to state grants is not uncommon Relationship through Negotiations Local government associations play an important and quasi-formal role in consultations and, in some cases, negotiations with the national governments in Germany, Austria, Switzerland, and the United Kingdom, but much less so in Australia and Canada. In effect, these more formal consultative arrangements with local government associations substitute for the more direct federal relationships with individual local governments in the United States. In the United States, the role of local government associations with respect to the federal gov- ernment is less formal and more that of lobbying than of consultation and negotiation. However, in both Austria and the United Kingdom local government associations are involved in formal negotiations with the national gov- ernment over the distribution of tax sharing and general grants, respectively. In Germany, according to the OECD (1983b:18): The Deutsche Stadtetag (Associations of Large Towns) plays a definite role in work leading to government and federal parliament decisions liable to affect cities. Association representa- tives must be consulted on all federal proposals in regard to town planning, land use, local fi- nance, and regional and local transport, and the Association representatives sit on several minis- terial committees with Bund and Lander ministers, e.g. the finanzplanungsrat (Financial Planning Committee). In both Canada and Australia, local government asso- ciations play a minor role with respect to the federal ,
101 government, but a much more important and formal role, particularly in Canada, in grant negotiations with the state government. NATIONAL RESPONSIBILITY FOR URBAN PROBLEMS In none of the countries in this study is there an explicit national urban policy nor periodic national urban policy reports, such as in the United States. Nor, except in the United Kingdom, has the national government accepted an important role in coping with the problems brought about by changes in the structure of the urban economy. To a large extent this is due to the long-standing concern in these countries with the lag- ging economies of peripheral regions, to which a variety of regional development policies have traditionally been addressed. Problems in large urban economies are rela- tively recent and, in many of these countries, only beginning to be perceived. All of the national governments, however, are in- volved to some extent with urban problems through pro- grams addressed to specific urban concerns. Typically, these programs are in housing, urban renewal, infra- structure, and local transport. In most cases these national programs are provided indirectly to local gov- ernments through state governments. In general, how- ever, with the exception of the United Kingdom, national government concern with urban areas has not been nearly so strong as in the United States. In the United Kingdom, sinner cities. policy is aimed explicitly at the regeneration of the inner areas of cities. The Turban program. provides 75 percent match- ing funds to local authorities for economic development and social services in inner city areas. The central government also provides cities with housing and trans- port grants. The German federal government provides urban renewal, transportation (both streets and public transport), and hospital construction aid for local governments and sets the framework within which the funds may be used. How- ever, the funds cannot be provided directly to local governments. Instead, they are provided to the state governments, which determine the distribution of funds to local authorities and the specific purposes for which they can be used. State implementation of the program
102 must be broadly consistent with the framework of the federal law. Canada and Australia both provide small amounts of federal aid for local governments. In Canada almost all aid is provided through the provinces (housing, urban renewal, and infrastructure), and in Australia aid is provided partially through the state government and partially directly. The direct grants for Australian local governments are, almost exclusively, for social services, while the indirect grants include aid for infrastructure and transportation (USACIR, 1981b:Ch.5). The institutional mechanisms by which the national interest in urban areas is manifested vary consider- ably. Most of the countries have no national equivalent of the U.S. Department of Housing and Urban Development that has at least formal overall responsibility for urban affairs. Instead, there are likely to be more narrowly focused ministries of housing and town planning or urban renewal. Again the United Kingdom is the ex- ception. The Department of the Environment has broad responsibility for carrying out sinner cities. policy, including efforts to coordinate the urban activities of other departments and to persuade those departments to ~bend. their programs to the advantage of urban areas. The coordination of national government policies affecting urban areas has been a problem recognized to some extent by nearly all of the countries, including the United States and the United Kingdom, the two coun- tries in which responsibility for urban problems is most firmly lodged within a single national department. In both Canada and Australia there was recognition during the 1970s that the broad range of federal government policies have important impacts on urban areas and that those impacts are frequently haphazard and unantici- pated. In order to address this problem, both countries established national ministries designed to coordinate federal policy and, in Australia, to initiate a series of federal programs for urban areas. In both countries, state opposition to an expanded federal role in urban affairs caused the ministers to be discharged (OECD, 1981a:13). The Canadian case, as described by the OECD (1983b: 10-11) is instructive: In 1971 Canada established the Ministry of State for Urban Affairs. Its basic function was to
103 coordinate federal policies affecting urban areas both within the federal government and with the 10 provincial governments. However, the Ministry had no direct functional responsibility--it coordinated the programs implemented by others rather than implementing programs of its own. However, compared with other ministries it was weakened by this lack of operational competence and, in addition, the provincial governments feared that it might come between them and the local authorities. Difficulty in accomplishing its task and increasing political pressure from those who considered it unnecessary or intrusive, led to the Ministry's abolition in 1979. Many countries have also established vertical mecha- nisms to coordinate national efforts to address urban problems. These mechanisms exist alongside, or in addi- tion to, the normal processes of intergovernmental rela- tions, which largely do not permit direct national-local relations. Such efforts appear to be most advanced in the United Kingdom, where Winner City Partnerships. have been established as a vehicle for providing economic development assistance to the largest local authori- ties. Each partnership is headed by a committee chaired by a central government minister and comprises represen- tatives of the local authority and central government departments. The committee, in consultation with busi- ness interests and community groups, prepares an Winner areas program,. which sets out an agreed strategy and program of action for three years ahead. In addition, the central government has set up Urban Development Corporations in the London docklands and Merseyside (Liverpool) as a means of bringing about urban regeneration in those areas. Unlike the partner- ship authorities, the Urban Development Corporations are superimposed on the existing local authorities in the two areas and provided with much broader development powers than the local authorities have. (The corpora- tions are the equivalent of urban renewal agencies in the United States but they have greater authority and are under less local control.) They are provided with central government funding and are expected to engage in large joint ventures with the private sector. Many countries make extensive use of ad hoc quasi- formal or formal intergovernmental agreements, usually
104 between federal and state governments, as a means of coordinating and sometimes implementing policies toward urban areas. In Canada (OECD, 1983b:98), for example: The coordination of government efforts to provide an economic development stimulus in lagging areas has been primarily accomplished through the mech- anism of the federal-provincial conferences and subsequent intergovernmental agreements, which, in effect, provide both levels of government with a vehicle for assessing some degree of joint fi- nancial responsibility for the attainment of ob- jectives in their common interest, or spheres of responsibility. In Germany, the economic problems of the Ruhr region-- a large, heavily urbanized industrial area--have at- tracted federal government concern not evidenced toward other urban industrial regions. As a consequence the federal government and the state government of North Rhine-Westphalia jointly developed and embarked upon a program of action for the Ruhr. aimed at Increasing the adaptability of the area and enhancing the attrac- tiveness of this the largest conurbation in Europe. (Wolman, 1982:109). In Austria, formal treaties are negotiated between federal and state government and among state governments for a variety of purposes. The city-state of Vienna, for example, has entered into a treaty with the sur- rounding state setting up a body to prepare and coordi nate (regional) relevant activities. While most of these governments have not been di- rectly concerned with urban policy, they have been quite concerned with, and take a direct responsibility for, regional policy. In general, regional policy is di- rected toward disparities in economic growth and devel- opment among regions. Most Western governments other than the United States operate a variety of place- specific incentives, usually in the form of capital sub- sidies to business firms that agree to locate or expand in eligible areas. Traditionally, regional policies have been aimed at peripheral and mostly rural or extractive regions, and large urban areas have been ineligible for regional incentives. However, as a con- sequence of concern over the slow economic growth of the Montreal area, the Canadian federal Department of Re-
105 gional Economic Expansion designated Montreal a special incentive area in 1977, making firms in the area eligi- ble for subsidies of up to 25 percent of the cost of new capital investment. In Germany, where regional policy is carried out through a joint federal-state committee, recent changes in eligibility criteria have made many heavily urbanized regions eligible for the first time for regional incentives. In the United Kingdom several large urban areas are also in regions eligible for re- gional incentives. DIVISION OF FUNCTIONS AND REVENUE SOURCES In most of the foreign countries examined, as in the United States, the federal system resembles a Marble cake. more than a slayer cake;. two or more levels of government play a role in many functions. The primary focus here is on which level of government actually delivers or administers a service regardless of which level finances it. However, the question of finance is obviously a critical one. A service can be delivered and financed completely by the local government, or it can be delivered by the local government and financed wholly or partially by other levels. Division of Functional Responsibilities In the German, Austrian, and Swiss systems, unlike the U.S. system, local governments are provided with constitutional recognition and what is, in effect, a federal grant of home rule. They may undertake local functions not expressly prohibited by law. The Austrian constitution also sets forth a specific set of local government functions. In addition, in both Austria and Germany, local governments are charged with administer- ing certain federal (and state) government activities, which are sometimes financed at least partially through grants and sometimes through local resources. German municipalities, for example, administer the federal wel- fare system. Contrary to the conventional public fi- nance wisdom that redistributive functions be financed nationally, German municipalities must finance welfare completely from the local budget, although eligibility and payment levels are nationally determined.
106 In Australia and Canada, as in the United States, local government functions are completely determined by the state governments, and in the United Kingdom they are completely determined by the central government. In all three countries, local governments may orgy do what they are explicitly permitted by the state (or, in the U.K.'s case,, central) government; there is no .home rule. author ity. Despite these differences) local governments in all of the countries except Australia perform a broad range Qua services, frequently in conjunction with, and partially funded by, state or national governments. In general, these services are much the same as those performed by ~ ocal U ~ S. ~ governments . Indeed, In some cases they go beyond those provided in the United States. Thus, for example, public: utilities such as. gas and electricity supply, are local functions in Germany, Austria, Swit- zerland, and Canada. Typically' functions that are primarily local include local roads, police (except zo Germany and Australia), fire, sanitation, parks and recreation, housing, primary education (in Germany, the state is responsible for teacherts salaries, while the local government is re- sponsible for school building construction and mainte- nance), hospitals and health care (except in the United Kingdom ), social welfare functions, public transporta- tion, and public utilities except ~ again F in the United Kingdom. In Germany and Austria, these services are provided either by municipal government or by other local boards,, districts, or authorities.* In the United *Public transport and gas, water, and electricity supply are frequently provided through municipally owned public utility holding companies. In Austria, local govern- ments are g iven unl imited powers to set up pr ivate companies to undertake an activity as long as it is consistent with law and regardless of whether it is a local function. In so doing the local government is legally cons idered a pr ivate entity and is sub ject to the laws of pr ivate companies . According to Pernthaler tl983: 11 ): Local government enterprises cover such activities as water and energy supply; traffic; sewage; garbage; hospitals; sports facilities; and public hous- ing. ~ This sector also includes the basic social wel- fare function.
107 Kingdom local functions are performed by one or both of the two-tier local government system (metropolitan and district government), a feature found in several Cana- dian metropolitan areas as well. Australia is the main exception to the rule of broad provision of local government services. Local govern- ments in Australia are, according to Jennifer Hutchinson (undated:45), Essentially administrative agents for state governments delivering a restricted range of ser- vices.. State governments in Australia are generally responsible for such ~local. functions as police, fire, education, housing, public transportation, hospitals, and, in some states, water supply, sewerage, gas and electricity. Assignment of Revenue Bases As in the United States, local revenue bases are assigned by the state-level governments in Australia, Canada, and Switzerland. However, in Austria, Germany, and the United Kingdom, local revenue bases are assigned directly by the national government, either by constitu- tional provision or legislation (although local govern- ments may raise revenues by charging fees for traded services). Assignment of revenue bases is complicated in Germany, Austria, Switzerland, and Australia by tax- sharing arrangements that divide portions of a specific tax or taxes among various levels of government. In the United Kingdom, the rates (property tax) is the only tax that local governments are permitted to levy. In both Canada and Australia, local authorities are also largely confined to the property tax for own- source tax revenues. In Switzerland, municipalities are typically per- mitted to levy a variety of taxes, although the exact mix varies from state to state. The state of Zurich, for example, requires its municipalities to levy an income and wealth tax, a capital gains tax, and a tax on households. It permits municipalities to levy a tax on real property and a transfer tax. The state of Bern requires municipalities to levy taxes on the same three sources mandatory in Zurich plus real property tax, and it permits a dog tax and an entertainment tax. With respect to the income and wealth tax, which al' Swiss states require municipalities to levy, the graduated
108 rates are set by the state. Each municipality can then determine, within limits set by the state, a proportion of the basic rate it wishes to levy; thus each municipality within a state has the same progressive rate structure even though actual rates may vary. In Austria and Germany, local taxes are assigned almost completely through a tax-sharing process. Tax sharing can take two basic forms. In the point-of- origin form, a tax is shared by setting aside or return- ing a set portion of the tax yield to the local govern- ment within whose boundaries it was raised. The remain- ing portion is retained or assigned to state or federal levels of government. In the redistributive form, a set percentage of a federal or state tax is set aside for local governments, in the aggregate, but that portion is not simply returned to the local government from which it was raised. Instead, it is redistributed to local governments generally in pursuit of equalization objec- tives. The redistributive form of tax sharing is, in effect, a general revenue sharing grant financed from a trust fund into which the proceeds of a specific tax are placed. In Germany, point-of-origin tax sharing is the main principle utilized. Local governments receive 15 per- cent of the federal income tax raised from citizens residing within the local government's boundaries. German local governments are also permitted to levy a property tax and a business and trade tax (a tax on business capital assets and profits). A portion (15 percent) of the local business and trade tax is, in turn, shared with the federal and state governments. Local governments are permitted to vary the rate of the business and trade tax only within a very limited range in order not to encourage competition for economic activity. In Austria, a broad range of taxes are shared among the three levels of government. Some of the taxes are shared on a point-of-origin basis and some on a redis- tributive basis. In Australia, redistributive tax-sharing arrangements exist between the federal and state government. Federal law also specifies that a percentage of federal revenue (2 percent of personal income tax revenue as of 1980) must be shared with each state for distribution to local governments within the state. The distribution of these tax-sharing entitlements to local governments is deter-
109 mined by each state on the recommendations of its state grant commission, partly on a population basis and partly on an equalization basis. Canada has no tax-sharing system as such. However, it does have a tax-cooperation arrangement between the federal and provincial governments through which the federal government collects the provinces' income taxes. Each province sets its own tax rate as a per- centage of the federal individual income tax payable (or, for corporations, a percentage of its taxable income). The federal government piggybacks the pro- vincial government's tax collection on top of its own, thus relieving the provincial government of all costs of collection. The actual distribution of local tax revenues by source is shown in Table 4-4. The table clearly reveals the importance of the property tax as a local revenue source in the United Kingdom, Canada, and Australia, as well as in the United States, and the importance of the income tax in Germany and Switzerland. It also empha- sizes the relative diversity of local tax sources in Austria, Germany, and Switzerland. TABLE 4-4 Local Tax Revenue by Source, 1979 Cor- pora- Individual tion Payroll Income Tax Taxes Taxes Real Taxes on Estate Goods Property Wealth and Tax Tax Services Other Australia 96.3 3.7 Austria 33.8 4.3 12.1 5.6 1.4 34.6 8.2 Canada 83.3 1.4 15.2 Switzerland 74.7 10.9 2.4 10.1 0.3 1.6 United Kingdom 100.0 United Stated 5.0 80.5 13.5 1.0 West Germany 59.7 11.9 7.4 12.7 0.8 7.5 Information for the United States is for 1977. SOURCE: organization for Economic Co-operation and Development (1980).
110 FISCAL FEDERALISM AND URBAN FINANCES The role of intergovernmental aid in local finances and the route through which it reaches local government treasuries varies substantially among the countries being discussed. Intergovernmental grants (exclusive of revenue from tax-sharing arrangements) range from a rel- atively small percentage of local government revenue in Austria (16.2 percent in 1978) and Switzerland (17.2 percent in 1974) to more than half of local government revenues in Canada (51.2 percent) in 1980 (see Table 4-5). However, both Austria and Switzerland have redis- tributive tax-sharing systems that might be considered the functional equivalent of intergovernmental aid. TABLE 4-5 Grants as a Percentage of Local Government Revenue (1980 unless otherwise specified) Country Percentage Australia Austria Canada Switzerland United Kingdom United States West Germany 21.9% (1979) 16.2 (1978) 51.2 17.2 ( 1974) 48.8 35.6 31.4 In most of the other countries (again, with the obvi ous exception of the United Kingdom) relatively little direct aid flows from the national government to local government. The typical pattern is for substantial amounts of general aid to be provided by the federal government to the state, and for the state, in turn, to provide both general and categorical aid to local gov- ernment. The overall pattern is one of much greater provision of general aid compared with categorical aid than is the case in the United States. The most striking difference between aid systems in these countries and in the United States is the degree
111 to which the other countries incorporate equalization factors in their distribution formula. Indeed, equali- zation is an explicitly stated objective of the grant system in many of these countries. In Germany, the fed- eral constitution calls for a Uniformity of living conditions. in the federation, and the rationale of the grant system is to assure average national standards (USACIR, 1981a:71). In Canada, the 1982 Constitution Act, which underpins the federal-provincial grant sys- tem, commits the federal government (Auld and Eden, 1983:475) to making equalization payments to ensure that pro- vincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of tax- ation. And in Australia, the terms of reference for the 1981 review of the federal-state tax-sharing arrangements (Mathews, 1981:15) stated: Each state's tax sharing entitlements should en- able it to provide, without imposing taxes and charges at levels appreciably different from those of other states, government services at standards not appreciably different from those of other states. The actual mechanics of fiscal equalization proce- dures differ from country to country. In Germany, the United Kingdom, and to some extent Australia, expendi- ture need (i.e., the need, or in economic terms demand, for services in an area) as well as tax capacity crite- ria are utilized. In Canada and Switzerland, however, equalizing fiscal capacity is the dominant concern and little effort is made to take need into account. Fiscal equalization efforts are primarily vertical--that is, a higher level of government redistributes resources among lower levels of government on an equalizing basis. In some cases, however, fiscal equalization occurs horizon- tally. In Germany, the transfer of fiscal resources from high to low fiscal-capacity states is negotiated (termed a ~brotherly. agreement), and in Austria and Switzerland some states require horizontal transfers of resources from local governments with high fiscal capac-
112 ity to those with low capacity. Typically, equalizing grants are provided by the fed- eral to the state-level government. In Australia, tax sharing is provided on a redistributive equalizing basis to the states. . . ~ In addition, special assistance--or equat~zat~on--grants are provided to the four finan- cially weaker states to enable them to provide services equivalent to those of the two ~standard. states (New South Wales and Victoria) without having to impose higher tax rates than those states. Australian local governments do not receive federal equalization grants. However, as noted earlier, a por- tion of federal tax revenues is set aside for distribu tion by each state to its local governments. The exact distribution of these revenues is determined by the grant commission in each state, but according to federal law, at least 30 percent of the distribution must be on a population basis and the remainder on a General equalization basis.. Canada also provides equalizing grants from the fed- eral government to the provinces. The basis for the distribution of these grants is the representative tax-capacity system, which has long been advocated for the United States by the U.S. Advisory Commission on Intergovernmental Relations. Relative fiscal capacity is measured by applying nationally averaged tax rates to a standard set of tax bases (measured on a per capita basis) for each province. Grants are then distributed to bring provinces up to the average level of the fiscal capacity of five ~representative. provinces; this ex- cludes fiscal outliers, such as rich Alberta, and thus reduces the amount of the equalization grant. This grant-distribution mechanism reflects a national change from the previous practice of pegging the equalization grant to the average fiscal capacity for all provinces rather than a representative set. The Canadian equalization system does not extend to local governments, nor do the provincial governments provide a substantial amount of equalizing general grants to localities. While the amount of aid from pro- vincial to local governments is substantial, nearly all of it is in the form of categorical aid for a broad variety of purposes--education, police, water and sewer services, neighborhood improvements, road maintenance, public transportation, and so on. Actual grant amounts and their distribution are determined within each state through a series of negotiations between provincial gov- -
113 ernments and the local government association. A small (less than 20 percent) but growing amount of provincial aid is provided as general grants to local governments, and some of that is provided on an equalizing basis (USACIR, 1981c:25). In the United Kingdom, the grant system is equalizing both with respect to local fiscal capacity and expendi- ture need. The U.K. central government calculates a per capita spending norm (termed a Grant Related Expenditure Assessment or GREA) that reflects a needs assessment for each local authority. The GREA is ~built-up. on the basis of estimates of need and the per unit cost of pro- viding services for each local authority function (e.g., the number of children requiring special education). The central government then sets a grant-related pound- age and a grant-related poundage schedule. The grant-related poundage is the single tax rate that all local authorities are expected to levy to fi- nance their GREG. Obviously, the same grant-related poundage will result in differences among local authori- ties in the amount of revenue raised because of differ- ences in local fiscal capacity. The government general grant (termed block grant) to a local authority spending at its GREA level (reflecting differences in need) is equal to the difference between the GREA level and the local revenue raised from applying the national grant- related poundage to its own base (reflecting differences in fiscal capacity). The GREA, however, is merely an expenditure guide- line; local authorities in fact do not usually spend precisely at that level. Local authorities spending at a level other than their GREA receive a rate-support grant equal to the difference between their actual per capita expenditure and the amount of locally raised revenue derived from applying the appropriate grant- related poundage for that expenditure level. The appro- priate grant-related poundage varies with expenditure level according to a grant-related poundage schedule. In 1982-1983, for example, the grant-related poundage was decreased by 0.6p for each pound of per capita expenditure below GREA and increased by 0.6p for each pound of per capita expenditure above GREA. In addition, the British system incorporates penal- ties for local spending above central government expen- diture thresholds. These penalties in effect result in lower central government matching payments for local expenditures above the threshold level (10 percent above
114 the authority's GREA in 1982-1983); for many of the larger urban authorities the matching rate becomes nega- tive and they actually lose grant payments. The German federal government does not provide gen- eral resources to the states through a grant system, but through the tax-sharing system described above. Of the two major shared taxes, the income tax is shared with the states and municipalities on a point-of-origin basis, while the value-added tax is shared with the states on a redistributive basis, taking equalization objectives into account. Thus, a portion of the value- added tax is made available to those states whose reve- nues are below the all-state average. These states receive a share of the value-added tax sufficient to bring their revenue to 92 percent of the state average (USACIR, 1981a:69). In addition to the vertical equalization, the states engage in horizontal equalization among themselves through a series of interstate consultations and agree- ments. As a consequence, those states with above- average tax capacity pay a portion of their ~surplus. to an equalization fund, which is distributed to the ~def- icit. states. The German constitution precludes direct federal grants to local governments for operating purposes. Instead, the constitution requires that each state dis- tribute a shore of state revenues to local governments. The exact share is unspecified, but in practice it var- ies between 20 and 30 percent for most states. Although the distribution mechanism is also unspecified, every state has chosen to distribute most of these revenues in the form of a general grant designed to achieve partial equalization. As Reissert and Schafer (1984:16-17) observe: It is surprising that all states created similar systems of unconditional grants for equalization purposes and that these systems have become vir- tually identical through a series of adjustments during the last 30 years despite the absence of federal legislation. The explanation seems to lie in the facts that the main characteristics of the system date back to a similar system created in the Weimar Republic and that developments in one state are closely watched and imitated in other states if local government lobbyists demand this. . . . .
115 The equalization grants take into account both tax capacity and fiscal need. Tax potential is calculated by applying a standard tax rate to each of three local tax bases: the real estate tax, the business tax, and the local share of the income tax. Need is determined primarily by population size. However, several states adjust population size to take into account the presumed greater need of municipalities that serve Central place. functions. Thus, a municipality's population is first adjusted by a factor that increases with city size. In 1977, for example, in Nordrhein-Westphalia the multiplier for municipalities with populations in excess of 500,000 was 1.35, compared with 1.25 for municipali- ties of 200,000, 1.15 for those of 50,000, and 1.05 for those of 10,000. This adjusted population size is then further adjusted by a factor related to the number of pupils in the municipality to take into account the needs of areas serving central-place functions. Other adjustment factors may then be used, but they are of relatively minor importance compared with the central- p~ace adjustments. The resulting adjusted population figure is then multiplied by a basic grant figure per capita, which is set up by the state, based on the total amount of available aid. The actual grant is calculated by comparing tax need with tax potential. Sufficient aid is provided to bring each municipality's resources (tax potential plus aid) to some percentage of its need (90 percent in Nordrhein- Westphalia in 1977). If a community's tax potential exceeds its need, it receives no aid. In Austria, a complex tax-sharing system results in substantial equalization among the states. In addition, a federal per capita equalization grant is paid by the federal government to states that have below average fiscal capacity (in terms of per capita receipts from the various tax-sharing schemes, since 96 percent of all state revenue is derived from tax sharing). The grant is sufficient to bring the below-average states up to the average tax capacity. Local governments also receive tax-sharing revenues. However, 13.5 percent of the local portion of tax shar- ing is deducted and provided to the state governments for operating a Community equalization fund.. The pro- ceeds of the fund are allocated by each state, on an equalizing basis, as grants to individual communities to meet specific needs. In addition, 5 percent of the local share of tax sharing is set aside for state per
116 capita equalization grants to local communities. These grants make up 30 percent of the difference between fis- cal need (calculated giving greater weight to cities with larger populations) and fiscal capacity. In Switzerland, federal tax sharing and special- purpose grants are provided on an equalizing basis to the states. Equalization is based on fiscal capacity rather than need. States, in turn, make both general and conditional grants on an equalizing basis to munici- palities. Several states have horizontal equalization schemes whereby municipalities with a high fiscal capac- ity transfer part of their tax capacity to poorer munic- ipalities. The lack of direct federal-local grant relationships is a striking difference between the United States and other federal nations. In Austria, for example, Pernthaler (1983:37) notes, folly a few direct federal grants are made directly to communities. . . . An attempt by the federal government to extend the range was vehemently rejected for the states.. In Germany, there are no direct federal-local grants. A 1975 sup- reme court decision held that while the federal govern- ment could define the broad proposal of grants for local government--in particular urban renewal, transportation, and hospital construction--the grants themselves had to be provided to the states with both the specifics of the grants and the distribution mechanism left at that level of government. German urban programs are thus more similar to U.S. block grants to the states for small- city community development than to the community devel- opment block grants that go directly from the federal government to entitlement cities. In Canada, there are almost no direct federal-local programs and the effort to establish a federal agency for coordinating urban affairs was ultimately scrapped as a result of provin- cial opposition. In Australia, there are a small number of direct federal grants to local governments, primarily for social service purposes, but a 1974 national refer- endum that would have greatly expanded federal govern- ment grants to local governments was defeated. CONCLUSION The utility of comparing the United States with for- eign countries frequently is seen to lie in the poten- tial for transferring the policies or practices of those
117 countries to the United States. While the possibility of such transfers does exist, the difficulty inherent in transplanting across systems of divergent political, social and economic characteristics should not be under- estimated. Perhaps a more valuable benefit to be gained from comparative analysis is that such analysis can both broaden the sense of the possible and provide a frame- work for better understanding our own behavior. The process of comparative analysis should lead to question- ing what frequently is simply assumed without question. Thus, the most valuable lessons derived may well be les- sons about ourselves rather than lessons about other countries. In order to provoke the introspection re- quired, it is useful to focus on the areas of greatest difference between national-local relations in the United States and in the other countries examined here. First, the most striking difference is the relative absence of equalization as an important objective of the intergovernmental fiscal system in the United States compared with the other countries. It is not probable that this reflects a more equal distribution of income among the states or among the major urban areas in the United States than in other countries. More likely, it reflects a strong U.S. aversion to redistribution as a political goal as opposed to redistribution as an inci- dental side effect, which of necessity, occurs in the pursuit of other objectives. In fact, the U.S. grant system, while mildly redistributive, is not equalizing. Davis and Lucke (1982:350) found a correlation of .154 between the per capita state distribution of federal grants in 1980 and state revenue capacity (that is, those states with higher fiscal capacity received, on average, more aid per capita than did states with lower capacity). As a result, fiscal disparities among states or among cities are much greater in the United States than in the other countries. The lesson the United States needs to learn is not how to set up equalizing intergovernmental transfers; it is how to develop the political will to do so. Second, direct national-local relations through the grant systems are much more prevalent in the United States than in the other federal countries, where the pattern is for federal grants to the state level and state grants to the local level. To some extent this reflects the U.S. history of relatively weak state governments and underrepresentation of urban interests
118 in state politics. The unwillingness of states to address themselves to urban concerns during the 1950s and 1960s, when urban problems began to emerge, led to direct federal-local relationships, which continue to exist (although President Reagan's block grants lead in the other direction), even in an era in which states are much more active and representative. However, to the extent that city problems are concentrated in states with low fiscal capacity, the lack of a strong system of intergovernmental fiscal equalization among the states reinforces the continued existence of direct national- local grant relations. Third, formal negotiations or consultations between local government associations and the national government --particularly with respect to grant arrangements--exist in many of the other countries. In the United States individual city governments and local government associ- ations lobby the federal government, but they are rarely brought so overtly into the governmental process. To some extent this reflects another difference between the United States and other federal countries. Federalism is a much more formal and legalistic set of arrangements in other federal countries, whereas in the United States it is more the institutional structure through which intergovernmental politics occurs. Fourth, categorical or conditional grants are much more prevalent in the United States, while general grants are more prevalent in other countries. The utilization of categorical grants in the United States reflects the U.S. response to the problem of how to pursue national objectives in a country with diverse local political objectives. The problem does not arise as much in countries with less regional political diver- sity than the United States, such as Germany, Austria, and Australia. (In countries with greater regional political diversity, such as Canada, the federal govern- ment has selected a much more limited set of national objectives to pursue.) The pursuit of national objectives is also dealt with more directly in some countries. The U.K. central gov- ernment, for example, simply mandates local government to carry out what it deems to be local objectives; there is no need to attach conditions to grants. In Germany and Austria, the federal constitution gives local gov- ernments autonomy, except where the federal government defines a federal interest (i.e., posits national objec-
119 Lives). In addition, in both countries constitutional arrangements require state and local governments to administer federal law. Finally, state governments play a much stronger role with respect to their urban areas in other federal coun- tries than in the United States. This observation, the explanation for which has already been touched on, sug- gests that any national urban policy in the United States should pay particularly close attention to the role of the states. In particular, the problem of how best to expand state responsibilities and actions for urban areas within the context of national objectives must be resolved. Reducing direct national-local grants and moving from categorical to block grants will not suffice if states do not themselves accept a more active role. In many of the countries examined, the lower direct federal government role in dealing with urban areas was accompanied by federal inducements or require- ments for states to pursue a more active urban role. Perhaps this is a direction worthy of examination for U.S. national urban policy. REFERENCE LIST AND BIBLIOGRAPHY Anderson, W. 1979 Internal memorandum to members of the Advisory Committee on Intergovernmental Relations on USACIR's Comparative Study of Four Federal Systems, May 8. Auld, D.A., and Eden, L.B. 1983 Federal-provincial financial equalization and the Canadian constitution. Government and Policy December(1):475-487. Baker, I.G. 1980 The impact of federalism on economic and fiscal policy in Australia. Pp. 310-336 in R.L. Mathews, ea., Federalism in Australia and the Federal Republic of Germany: A Comparative Study. Canberra: Australian National Univer- sity Press. Beam, D.R., Conlan, T.J., and Walker, D.B. 1983 Federalism. Pp. 247-279 in A.W. Finifter, ea., Political Science: The State of the Disci- pline. Washington, D.C.: American Political Science Association. ^
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