GOVERNMENT, GOVERNANCE AND THE DIVISION OF POWERS: Econ 881/SPS 844 – Introductory Notes Winter -- 2010 by Thomas J. Courchene Jarislowsky-Deutsch Professor

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  • GOVERNMENT, GOVERNANCE AND THE DIVISION OF POWERS: Econ 881/SPS 844 Introductory Notes Winter -- 2010 by Thomas J. Courchene Jarislowsky-Deutsch Professor School of Policy Studies, Queens and Senior Scholar Institute for Research on Public Policy Montreal
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  • OUTLINE Variations on Federalism: Administrative, Legislative Upper Chambers Division of Powers Vertical and Horizontal Fiscal Imbalance Unitary States and Decentralization Duplication and Overlap Accommodating Policy Interdependencies Subsidiarity Asymmetric Federalism Global City Regions and Federalism Competitive Federalism Societal Values and the Nature of Federations
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  • Administrative Federalism The characteristic of an administrative federalism is that the legislative authority does not coincide with the administrative authority. In continental European federations--Germany, Switzerland and Austria-- most legislation is federal while the implementation or administration of these laws is left to the sub-national governments (e.g., taxes in Germany). This requires extensive collaboration between levels of government. In the case of Germany the key federal institution is the Bundesrat (the upper chamber) which is in reality a House of the Laender, with from 3 to 6 votes per Laender depending on population, and which has a veto on all legislation pertaining to the Laender
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  • Legislative Federalism Federations in the Anglo-Saxon tradition (United States, Australia, Canada) are typically characterized by legislative federalism, where each order of government is generally assigned executive or administrative responsibility in the same areas that it has legislative authority. This reinforces the autonomy of the legislative bodies (and in particular the sub-national governments) This is necessary for Parliamentary federations such as Canada and Australia since it is only if the legislative and executive functions coincide that Parliament can hold the executive (government) responsible
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  • Sub-national Role in Central Institutions: I Traditionally, the upper house (often called the Senate) in federal systems plays the role of representing the sub- national governments in the central governing institutions. The Bundesrat is a true house of the regions in that the representatives (3-6) in the Bundesrat come directly from the Laender government and vote accordingly The classical upper house is triple E---elected, effective and equal. The US Senate is clearly triple E--elected, equal representation by state and effective (i.e., with the same powers as the House, and then some). The Australian and Argentine Senates are close to EEE
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  • Sub-national Role in Central Institutions: II The Canadian Senate is appointed (until age 75), is roughly equal by region (but not by province), and it has essentially the same powers as the House of Commons However, it generally does not exercise these powers because the process of appointing rather than electing Senators deprives the chamber of the moral authority (or legitimacy) to exercise its full powers. Since nature abhors a vacuum the interests of the Canadian provinces have surfaced in the form of strong provincial premiers who on occasion become the effective opposition to the federal government. One would assume that an elected Senate would reduce provincial power in the federation.
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  • Division of Powers: General There are several ways to assign powers in a federation: Assign them exclusively to one of the levels of government--federal, provincial/state, or municipal; Assign them as shared or concurrent powers, typically with federal paramountcy (CPP/QPP is an exception) Leave them un-assigned but presumably subject to a residual clause or residual authority (e.g., the sub- national level and/or citizens, as in the USA). The federal spending power in most federations allows the federal government to operate in provincial/ state matters (Australia more so than Canada) Most federations provide the central government with emergency or over-ride powers
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  • Division of Powers: Canada vs USA Canada and the United States represent two very different approaches to the division of powers: The USA has a set of exclusive federal powers, has some shared powers and then assigns the remaining powers residually to the states or to the people. Canada has a set of exclusive federal powers, also has a large number of exclusive provincial powers, has a few shared/concurrent powers, and then assigns any remaining powers to the federal government. Yet in practice the Canadian federation has become more decentralized than the US federation
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  • Division of Powers: Tax Assignment: Theory The tax assignment literature would assign the central government control over customs and excises, over very mobile tax bases (corporate taxes), and over origin or source-based taxes (to prevent interstate tax exporting) Sub-national levels should have tax bases that have stable revenues and low inter-jurisdiction mobility--e.g., destination-type sales taxes for provinces and property tax for municipalities Tax bases that are unequally distributed among provinces should be central Benefit taxation or user fees are appropriate at all levels but are most popular at the municipal level personal income taxes--federal (because of role in distribution) or state (because they are quite stable)
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  • Division of Powers: Tax Assignment: Practice The VAT (GST) has emerged as a very important tax. Its export/import neutrality makes it ideal for a country that wants a larger government than its trading partners, e.g., Canada has a VAT but the USA does not. These taxes are generally imposed nationally, but there are a few examples of their implementation at a subnational level. These assignment principles are not always followed. For example, three Canadian provinces have their own corporate income taxes, and unequally-distributed energy resources are taxed provincially Constitutionally, the Canadas tax assignment allows the central government to access any sort of taxation, while it limits the provinces to direct taxation. However, the courts have ruled that destination-type sales taxes (PSTs) are direct taxes. Some of these are now in GST format
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  • Division of Powers: Expenditures In a federal system each level of government can be assigned what it can do best. This generally means assigning the federal government the stabilization function (and certainly monetary policy), the distribution function and the provision of those public goods that affect the well-being of the whole society--external policy, defence, food and drug testing, etc The subnational levels can supply those goods and services designed to serve their residents and those that can differ in line with different jurisdictional preferences. Generally, this includes health, education, welfare, as well as obvious local expenditure and regulatory tasks. In many federations, these provincial responsibilities have grown dramatically, with the result that the subnational level often spends more than the federal level
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  • Vertical Fiscal Imbalance Most federations are characterized by a vertical fiscal imbalance (VFI). Typically the federal government has access to revenues in excess of its assigned expenditure responsibilities. Sometimes this has developed over time -- for example when subnational spending requirements for say health and education begin to outstrip their access to revenues. This VFI can in principle be addressed in several ways-- transferring powers to the central level, allocating greater tax room to the provinces, forcing the provinces to borrow (only a temporary solution), and relying on intergovernmental (federal-provincial) transfers to offset the VFI. All have been used in the Canadian federation Most federations resort to intergovernmental transfers on a permanent basis.
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  • Transfers and the Division of Powers The incentives within, and the magnitude of, inter- governmental transfers will have an influence on the de facto or effective division of powers. Reliance on Conditional Transfers (e.g., 50% sharing grants) can induce provinces to implement the priorities of the federal level and, therefore, may serve to undermine the autonomy of subnational governments In contrast, Unconditional Transfers serve to enhance provincial autonomy and effective decentralization Many federations employ conditional transfers to encourage common standards across all provinces and then make them less conditional over time Over 50% of Australias grants are conditional while only about 5% are conditional in more decentralized Canada
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  • Horizontal Imbalance Most federations have equalization programs to address horizontal fiscal imbalances across provinces/states. The USA is probably the only outlier here Canadas constitutional wording is: Parliament and the Government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public goods and services at reasonably comparable levels of taxation Australia has the most comprehensive approach to equalization. It brings states up and down to the national average for both revenue means and expenditure needs
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  • Horizontal Imbalance: II Canada brings all provinces revenue capacities up to (or close to) a national standard, but does not equalize the revenue c