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(共31张PPT)
FISCAL FEDERALISM AND STATE AND LOCAL GOVERNMENT FINANCE
C h a p t e r 18
Fiscal Federalism
Federal system of government is characterized by numerous levels of government, each with its own powers to provide services and raise revenue
Three categories: federal (or central), state, local
Fiscal federalism is division of taxing and expenditure functions among levels of government
Many government-supplied services require central coordination and can be costly or impossible to provide by local governments
Economic stabilization programs, major social programs, etc.
Supply of Local Public Goods
Local public goods – goods with benefits that are nonrival only for that portion of the national population who live within a certain geographical area
Likely to be most effectively produced by local governing units
Police and fire protection, refuse collection, traffic control
Allows governments to accommodate wide array of tastes and demands for services in accordance with local variations in demand patterns and cost conditions
Citizens with similar tastes in certain public services tend to congregate together, form local governments
National v. Local Political Equilibrium
Central provision of government services tends to result in uniformity of quality and quantity of public goods across all regions
Resulting collective choices represent national political equilibrium
Means of financing government-provided services can vary with local desires when government is decentralized
Tax and expenditure decisions in one governing jurisdiction not independent of those in others
Political Jurisdiction
A defined geographical area within which individuals make collective choices on government functions and government-provided services
Each has a governing authority, its own political institutions
In federal system, political jurisdictions both centralized and decentralized
Each citizen within jurisdiction of central government; lower levels of government represent subsets of the population
The Tiebout Model
Developed by Charles M. Tiebout
Says that level and mix of local expenditures and taxes are likely to show wide variations among local political jurisdictions
Citizens who can be mobile among communities choose to live where government budget best satisfies their preferences for public services
Thus, government expenditure and revenue patterns tend to be set on local level
Quasi-market equilibrium attained when all residents are located in community that best satisfies their political preferences
Useful in explaining movements within constrained geographic area
Interjurisdictional Externalities
Costs or benefits of local government goods and services to residents who live in other political jurisdictions
Result in benefits and costs that spill across geographic boundaries of jurisdictions
Example: deduction of state and local taxes from federal income tax base
Cost spillover that enables local communities to finance government services through reduction in federal income tax collections
Local Tax Base
Possibility of induced locations effects of local taxation may partially account for local reliance on property taxation in the U.S.
Unrestrained property taxation, however, can result in reduced economic development and reduced value of real property tax base
Local government-supplied goods and services financed with local taxes can have effect on property values
Property taxes used to finance high-quality schools, demand for property increases
Elasticity of Local Tax Base
Elasticity of the tax base (ET) – ratio of the percentage change in tax base attributable to any given percentage change in the tax rate applied to that base:
B = tax base in dollars
t = percentage rate of taxation
Tax base may be elastic (ET < –1), of unitary elasticity (ET = –1), or inelastic (ET > –1)
Elasticity of the Tax Base
Tax Competition and Exporting
Elasticity of tax bases often results in competition among communities for residents and businesses.
Competition often acts as constraint on sizes of local public budgets.
Jurisdictions reluctant to raise taxes may lack public services that attract residents
Tax exporting common in resort communities, popular with tourists
Taxes on hotels paid by tourists but used to finance local public services
Deductibility of state and local income taxes from federal income taxes is a form of tax exporting
Fiscal Capacity
A measure of the ability of a jurisdiction to finance government-provided services
Likely to vary with values of local tax bases and ability to export taxes
Low-tax-base communities likely to encounter difficulties in supplying acceptable minimum levels and qualities of public services
Measures of Fiscal Capacity
Local governments rely heavily on property taxes, so most relevant measure would be assessed valuation per capita.
When property tax base is used mainly to finance schooling, assessed valuation per pupil may be best measure
When useful to measure extent to which subnational governments provide services to residents, per capita expenditure can be used
Can also use per capita income and per capita retail sales
Revenue Effort
Ratio of tax collections from all sources in a taxing jurisdiction as percentage of personal income in that jurisdiction, to the national average of that ratio for all jurisdictions
Does not consider fact that jurisdictions with low personal income require high revenue effort to maintain same level of per capita public expenditure as in high income areas
Value of revenue effort over 100% implies that the jurisdiction is raising greater amount of revenue than national average per dollar of personal income
Intergovernmental Fiscal Relations
Variation in fiscal capacity among state and local governments provides basis in intergovernmental aid to ensure minimum level of certain public services in all regions of nation
Intergovernmental aid helps achieve more efficient allocation of resources by internalizing interjurisdictional externalities
Grants are intergovernmental transfers of purchasing power that can be used to help achieve a wide variety of social objectives
Grants
Categorical grant-in-aid – a transfer of funds from higher level government to lower level with specified conditions attached to expenditure of funds
Income support, health care
Matching grants – grants with requirement that recipient jurisdictions match each dollar of federal aid with certain amount of locally raised revenue
Unconditional grants – revenues are shared among governments with no strings attached for use of funds
Federal Grants
Have increased greatly since 1970
Most to state and local governments to fund federally mandated entitlements to individuals
Medicaid, cash transfer programs
Grants to local governments go mostly to education, housing and community development, waste treatment facilities, and airport construction
For categorical grants to be efficient, must be allocated according to system that accurately evaluates spillovers and their ranges
Federal Grants
Federal Grants
Unrestricted Grants and Fungibility
Unrestricted grants include what are often referred to as general revenue sharing
Restricted grants are those available only for specific purpose, must be spent on that purpose
Block grants are principle type of unrestricted grant with minimal restrictions on uses to which funds can be put, rarely require matching local funds
Fungibility means that money can be used for more than one purpose
Grant with or without restrictions on use of funds frees local monies that otherwise would be spent on government-provided services
Theory of Grants
Matching grants are more likely to stimulate citizens to agree collectively to expand production of public goods than are equal-dollar-amount general-purpose grants
Income effect of grant depends on income elasticity of demand for public goods
General-purpose or categorical grants result only in income effects, therefore may decrease amount of government-supplied goods and services produced by community if citizens view these goods and services as inferior
Grants and Political Equilibrium
Grants and Political Equilibrium
Model of grants assumes that bureaucrats, politicians respond to desires of median voter
Some models suggest that mechanism of grants is such that normal political process can be bypassed by bureaucrats who spend funds
- Presume bureaucrats will spend money according to their goals without any voter input
- Referred to as the flypaper effect
Evidence shows that tendency to spend grant money on government programs is higher than tendency to spend private income on such programs
Matching Grants and Efficiency
Education Finance
In U.S., public elementary and secondary education primarily responsibility of state and local governments
Federal government finances about 6% of total cost
Amounts to nearly 40% of state and local government budgets
Primary responsibility often falls on local governments: cities, counties, school districts
Decentralized Supply of Schooling
U.S. decentralized system of public schooling and finance allows community to tailor mix schooling and other services to demands of citizens
Retirement community with few young children spends less on schooling than community filled with young couples
If demand for schooling is inelastic, high-income communities spend more per pupil than low-income communities
According to Tiebout model, people will decide where to live by considering quality of schooling services
Schooling: Role of States
Side effect of decentralization of schooling is that least mobile (the poor) are often stuck in areas where resources to finance schooling are low, quality is poor
Disparity in expenditure per pupil arises from differences in taxable property values per pupil among jurisdictions
To compensate for disparity, most state governments have formulas for state aid to local jurisdictions that are inversely related to property values and incomes in each jurisdiction
District power equalization plans subsidize education with grants inversely related to districts’ fiscal capacity
Other plans use grants that set a foundation level of expenditure per student, aid districts in which high local property tax rates would be needed to meet the standard
Voucher Systems
Voucher system intended to improve schools’ productivity by inducing competition
Now appears that public schools lack incentives to improve student performance while economizing on cost
Designates state funds to be used to finance tuition at private schools
Each family receives voucher to pay for education service for each child that can be redeemed for cash by either private or public schools supplying educational services
Voucher Systems – Cons
Argued that if used at parochial schools, violate separation of church and state
Schools that do a good job will prosper, while those that cannot effectively educate students will fail
Argued that competitive markets cannot prevail for schooling
Poorly educated parents could lack ability to evaluate alternative schools
Disruptive to transfer students among schools; transportation may not be available
Voucher Systems – Pros
Argued that there is already an element of choice in schools favoring upper-income groups; voucher plan could give low-income families more choice
Under voucher system, geographic segregation of students need not be the norm
Promotes educational equality and more diversity in schooling
Use of vouchers provides incentives for educational innovation in nation where quality of schools appears to be declining
Alternatives to Vouchers
Turning over control of public schools to private managers instead of run by bureaucrats or civil servants
Hire specialized firms to run schools with goal of improving educational output
Provide more training for teachers, develop suitable teaching materials
Charter schools, directly managed by parents or other groups closer to schooling process instead of centralized school district

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