Disaggregating Government

There is a strong tendency in the modern design of American government to disaggregate government authority. Instead of lumping responsibilities onto the plate of an all powerful sovereign (like the U.K. Parliament which has the power to dissolve all subordinate entities at will and no meaningful constitutional limitations outside the area of human rights), the tendency is to to set up self-sustaining systems, more or less independent from the rest of government to perform a function.

The second largest government employer (not just now, but for most of U.S. history) as been the United States Post Office. For more than three decades, however, it has been a state owned enterprise that is primarily responsible for managing itself and raising its own revenues. A good share of the federal appropriation for the postal service amounts to payment for the part of the service that the federal government itself uses.

The nation's major roads and bridges have executive branch departments at the federal, state and local levels charged with maintaining them, but most routine revenue for this system comes from a group of excise taxes, like the gas tax, tailored to the purpose.

The civil side of the court system is overwhelmingly funded with fees paid by litigants. Real estate records, corporate records, vehicle registration, driver's licensing and professional regulation are also financed through user's fees.

Almost all special districts except school districts are funded more or less entirely through their own combination of property taxes, user's fees, earmarked sales taxes, private grants, and public grants. School districts were originally funded almost entirely through local property taxes with state governments stepping up to the plate with general fund appropriations only because local property taxes proved to be a dysfunctional form of school funding in many places.

Public institutions of higher education in Colorado are increasingly becoming non-profit enterprises that receive government grants sporadically, rather than integral parts of the state bureaucracy. Tuition, fees, institutional endowments and research grants pay most of the bills. In an effort to deal with TABOR, much of the aid previously provided to institutions is now provided mostly through scholarships to in state students who may attend public or private institutions with their money. Community colleges have earmarked funding from casino taxes. It may be only a matter of time before high education, which is always first in line for cuts when the general fund grows scarce, may decide that they would prefer to trade general fund appropriations to institutions for some suitably sized dedicated tax source -- severance taxes or a small state property tax levy perhaps. One way to save the federal estate tax might be to give it a constituency for its modest revenue stream, perhaps higher education scholarship and loan funding.

Social security and Medicare, the programs that ate the federal budget are funded primarily through earmarked payroll taxes. Social security has been hived off from the Department of Health and Human Services into an independent agency.

Politically, earmarked taxes are much more marketable than general purpose taxes. One of the key factors that made the European social welfare state politically acceptable, despite the fact that it results in such high levels of taxation, is that social welfare taxes are clearly identified with the services that they are providing to the people who pay them. A payroll tax for health insurance looks less ominous when it takes a hefty health insurance premium out of the firm budget. The highly regressive Social Security payroll tax has retained popularity because almost everybody gets at least the money that they put in back and the net combination of taxes paid and benefits received is meaningfully progressive, even though the tax standing alone is not, and the more generous Social Security is, the less people have to set aside every pay period for private retirement savings.

Deficit hawks have bemoaned the crush of entitlements on the federal budget. But, entitlement programs are a natural fit with the program of setting up autonomous, more or less independently funded and operated systems that meet needs that a governmental responsibilities. The need to compare apples and oranges in a more free wheeling budget process leaves so much room for error, that the legislative branch often ends up ceding really policy making authority in favor of complying with its limitations and honoring the standing mini-deals maintained in executive branch budgets aside from some minor tinkering at the fringes.

Colorado's Amendment 23, which guarantees certain funding levels from the general fund for K-12 education, is similarly a natural move in this direction. It leaves K-12 education with an earmarked property tax revenue stream and a core protected piece of the state general fund that is insulated from the whims of the political budget process to pay for a core function of government. It makes state general fund revenue for K-12 education act like a long term property tax in an area with stable property values instead of like the every contingent food fight for political power that it was before Amendment 23.

This plays out at the local level too. Aurora voters are being asked to separately earmark property taxes for a separate library district, or see dramatic cuts in its library services this year. Aurora could have asked for a general tax increase for a general budget shortfall, but found spinning off one function along with a dedicated source of revenues for it more palatable.

Disaggregating government so that most specific functions of government have earmarked revenue streams creates sustainable, low maintenance systems to keep all of the functions available to provide important services indefinitely to the people with a minimum of political strife.

Of course, this comes at a price. Earmarking revenue is the public sector equivalent of leveraging an investment. The government functions reliant upon residual general revenues face ever more intense budget fights over a highly cyclical amount left over after mandatory payments are made, and the risk of an overconstrained situation where the is no legal way to meet all of the legal obligations of the budget process looms ever larger. It also makes the disaggregated parts free from the need to be efficient with their share if their dedicated revenues turn out to be overgenerous, while leaving those parts with skimpy dedicated revenues at a perilous brink begging for their survival every budget cycle. The insufficiency of gas taxes and lack of political clout for the diffuse users of roads and bridges, for example, has led to scandalously deferred maintenance.

No one has consciously made a decision at a global level about what should and should not be in the general fund. It simply covers every service that has not opted out. But, rather than trying to reaggreate government revenues and centralize the budget process, it may make more sense to openly acknowledge what is going on and to strike to find independent bases of revenue support appropriate to every major and minor function of government, with the legislative budget process fading into the background replaced by a larger process sunset review type process that periodically examines each component of the system and recalibrates its revenue sources with its ongoing needs. This kind of longer run approach aimed at sustainable solutions to parts of the puzzle would promote the more deliberative and episodic decision making model that legislatures are better suited to participating in meaningfully.