Federal Trims Could Mean Local Windfalls : Economy: Return some taxes to states and cities to jump start public-works investment, jobs.

State and local governments have borne the brunt of most social and economic problems and often lack the means to deal with them. But in their haste to cut taxes, while--in theory--cutting government spending, political leaders have lost sight of the problems this creates for states and cities.

Years of federal deficits have worsened their problems. Public works is one area in which states and cities have cut capital budgets to reduce rising debt-service costs. Giving the states the capacity to increase their infrastructure investments while putting a work requirement on welfare would have both economic and philosophical symmetry.

A sensible approach to downsizing the federal government would be to return some federal taxes to state and local governments while cutting the bureaucracy to offset the federal losses. Such an approach could, for example, return a part of the federal gasoline tax to states and cities to make badly needed infrastructure improvements. If 10 cents per gallon of the federal gasoline tax (about half of the total) were returned to the states over, say, five years, this would amount to $10 billion a year when fully phased in. This would have to be offset by an equivalent reduction in federal expenditures. As part of “reinventing government,” there will be many candidates for such cutbacks.

The states could either use the money on a pay-as-you-go basis or they could leverage the funds by borrowing against the gas tax to pay off their bonds over 20 to 30 years. A conservative financing structure could easily accommodate up to $25 billion of incremental annual construction, which would create 700,000 to 800,000 jobs a year for 10 years. These jobs would constitute an additional safety net for workers displaced by foreign competition and defense conversion as well as a possible avenue to work for some welfare recipients. More than 7 million real investment-related jobs is a serious underpinning to the economy.

The cities are at the bottom of the pyramid, and as first the federal government and then the state governments cut taxes, the cities are left with their problems undiminished and their resources shrinking. This is an area where combining both Democratic and Republican approaches could work well and be responsive to real needs. The Republican approach to send resources and responsibility back to the states while shrinking the size of the federal government has much to commend it; it could be combined with the Democrats’ call for greater public investment.

The nation’s economic well-being has historically been dependent on adequate levels of public investment under both Democratic and Republican presidents. Franklin D. Roosevelt helped steer American through the Depression, in part through the activities of the Reconstruction Finance Corp. and other significant public-investment projects. In the 1950s, Dwight D. Eisenhower launched the interstate-highway program, which helped sustain an economic boom well into the 1960s.

At a time when we are looking for ways to fight crime, offset job losses in the private sector and improve the quality of urban life, a significant increase in public investment is long overdue.