SHIFTING POWER OUT OF THE BELTWAY
By Alice Rivlin Suneel Ratan

(FORTUNE Magazine) – Past plans to devolve more of Washington's responsibilities failed because they either weren't thought through or were politically inopportune. Economist Alice Rivlin, 61, a Brookings Institution fellow, may have a winner. Her new book, Reviving the American Dream, is both a thoughtful and a timely blueprint for pushing power down to the states and cities. Rivlin spoke with FORTUNE's Suneel Ratan.

Part of the reason for the public's low confidence in government is that no one's sure who's in charge of what. I'm proposing a stricter division of labor. The federal government should manage social insurance and foreign affairs, and areas where activities cross state lines, like air-traffic control or acid rain. It should also take responsibility for financing the health system, because it's in crisis and the states can't handle it on their own. The states should take charge of a productivity agenda that includes education, training, community development, housing, and the infrastructure. Those things are best handled at the state level because variation and experimentation are necessary and we want adaptation to local conditions. Policies are not going to work unless citizens are really involved and state and local officials are accountable for what happens. My scheme would take something on the order of $75 billion off the federal budget. There would still be a need for more revenues, but polls show that it's easier to raise taxes if people know what the money is for -- as they would, for example, if the federal government financed health care through dedicated taxes. The states would get together and pass shared taxes -- perhaps a common sales levy, although a value-added tax would be better because we could more easily apply it to professional services without double-counting at the retail level. Another possibility is a common corporate income tax, which would end a lot of difficulties for multistate companies. The revenues then would be allocated to the states on a fair basis, like population for the value-added tax or a weighted average of employment, sales, and investment for the corporate tax. The states could also implement the system through an interstate compact. Indeed, they might prefer to act on their own, since the federal government could put strings on the money or take it back -- as happened with revenue sharing. My proposal isn't liberal or conservative -- it's both. I'm concerned with improving public services, not with getting the federal government out of everything. It's a managerial question, and right now there are just too many things for the federal government to manage.

FORTUNE's 18-month forecast will appear in the next issue.