U.S. treasury department studies of federal- state-local fiscal relations: the context,the major themes,and the outcome

This article provides an assessment of the condition of the literature on several major issues of Federal-State-local fiscal relations. The assessment is provided in the context of a three-volume report on Federal-State-local fiscal relations recently published by the U.S. Treasury Department. The author was a major participant in the studies who generally views them favorably, but who also raises his real concerns about a number of matters.

This article summarizes and evaluates certain aspects of the economic theory of federalism, the intellectual underpinnings of the report. This article addresses the institutional context in which the report was written, which helped shape its approach, content, and conclusions. The report itself generally lacks detailed recom-mendations.

Three main themes of the report are addressed in detail in this article. These are: (a) issues relevant to programs of general-purpose fiscal assistance, which include the adequacy of any potential improvements that might be made in measures of the fiscal capacity of State and local governments; (b) the role, if any, for tax subsidies to State and local governments through the deductibility of State and local taxes in the computation of individual Federal income taxes, and the exemption from Federal income taxes of interest paid on bonds and notes issued by State and local governments; and (c) the projection of the long-term outlook for the fiscal condition of the State-local sector on a current services basis, compared with projections of the long term outlook for the Federal government.     

Allocative medicine: efficiency, disease severity, and the payment mechanism.

Health care expenditures now account for nearly 10 percent of our gross national product, the highest share ever recorded. Concerned that this represents too many resources being devoted to health care, policymakers are searching for ways to control health care expenses. These include higher coinsurance and deductibles, measures to increase market shares of health maintenance organizations, and conversion from cost reimbursement to prospective reimbursement. These measures contain many incentives for patients and providers to alter use of health care services. However, aggregate resource use may or may not be lower and more efficient under these new programs. To determine whether limited resources would be devoted to maximizing the nation's health, incentives inherent in each policy option must be examined. This article describes a classification of types of disease and medical care outputs. The framework is then used to examine incentives offered to patients and providers by three alternative payment mechanisms--capitation, fee-for-service, and payment by diagnosis--regarding types of disease treated and mix of outputs produced. This type of analysis is required to select an appropriate payment mechanism for obtaining a socially acceptable allocation of resources.