Chapter 10 State and Local Government Expenditures

7/25/2019 Chapter 10 State and Local Government Expenditures

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10

10.1 Fiscal Federalism in the United Statesand Abroad

10.2Optimal Fiscal Federalism

10.3 Redistribution across Communities

10.4Conclusion

State and Local

Government Expenditures


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10

Fiscal Federalism

The United States has a federal system,dividing activity between a nationalgovernment and state and localgovernments

!ducation, for e"ample, is often provided bystate governments

Optimal fscal ederalism:The #uestionof which activities should ta$e place at

which level of government


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10.1

The distribution of government spendinghas changed dramatically over time in theUnited States

%ocal state and spending have declinedconsiderably

&uch state and local spending nowsupported by intergovernmental grants

o Intergovernmental grants:'aymentsfrom one level of government to another

Fiscal Federalism in the United States and Abroad


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10.1

State and Local Spending in the United States

1!0"#"010


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10.1

State and local governments rely on multiplesources of revenues

State governments use sales and incometa"es primarily

%ocal governments use property ta"esheavily

o Property tax:The ta" on land and any

buildings on it, such as commercialbusinesses or residential homes

Spending and $evenue o% State and Local

Governments


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10.1

Spending and $evenue o% State and Local

Governments

Spending even!e

State

()'C State

()'C

!ducationspending

A* +,- .ncome ta"es

/0 1,+--&A 1,23+ &T 453

T/ -,5 &any

6ealthcarespending

7C -,+38

Salesta"es

7C -,439

%A 2,958 .owa 284

UT 5,+- &any


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10.1

Fiscal Federalism Abroad

Spending"# oall$

even!e "#o all$

:reece 4

'ortugal -+9 55

France 1+ -1-

/orway ++5 --8UnitedStates

5 +59

7enmar$ 2++ 139

O!C7 134 125

&any countriesengage in ;scale#uali


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10."

>hat determines how much and howe?ciently public goods local governmentsprovide@

The mar$et provides the optimal amount ofprivate goods

>hy does the mar$et do so well for privategoods but not public goods@

Tiebouts insightB shoppingandcompetition

&he &iebout 'odel


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10."

There is neither shopping nor competitionfor national government

ut when public goods are provided at thelocal level by cities and towns, competitionarises

o .ndividuals can vote with their feet

This threat of e"it can induce e?ciency inlocal public goods production

&he &iebout 'odel( Shopping and )ompetition


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10."

Competition across towns can lead to theoptimal provision of public goods

Towns determine public good levels and ta"rates

'eople move freely across towns, pic$ingtheir preferred locality

'eople with similar tastes end up together,paying the same amount in ta"es andreceiving the same public goods

There is no free riding because everyonepays the same amount in each town

&he Formal 'odel


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10."

The Tiebout model re#uires a number ofassumptions that may not hold in realityB

'eople are actually be able to move

'eople have full information on ta"es andbene;ts

'eople must be able to choose among arange of towns that might match my tastefor public goods

The provision of some public goodsre#uires su?cient scaleor si


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10."

The Tiebout model re#uires e#ual ;nancing ofthe public good among all residents

(!mp)s!m tax: A ;"ed ta"ation amountindependent of a persons income,consumption of goods and services, orwealth

%ump sum ta"es are often infeasible)unfair,so ta"es are income or wealth based

ut then the rich pay more than the poor,so the poor chase the rich

*roblems +ith &iebout )ompetition( Financing


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10."

To $eep poor people from chasing rich people,towns enact


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10."

The Tiebout model assumes that publicgoods have e=ects only in a given town andthat the e=ects do not spill over toneighboring towns

&any local public goods have similare"ternality or spillover featuresB police,public wor$s, education

.f there are spillovers, then lowEta", lowE

bene;t municipalities can freeEride o= ofhighEta", highEbene;t ones

,o Externalities-Spillovers


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10."

Tiebout competition wor$s through sorting

A testable implicationB >hen people havemore choice of local community, the tastesfor public goods will be more similar amongtown residents than when people do nothave many choices

Comparing larger and smaller metropolitanareas with more and less choiceG, this

seems to be true

$esident Similarit Across Areas


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10."

'eople not only vote with their feet, they alsovote with their poc$etboo$, in the form ofhouse prices

+o!se price capitali'ation: .ncorporationinto the price of a house the costsincluding local property ta"esG and bene;tsincluding local public goodsG of living in thehouse

Areas with relatively generous public goodsgiven ta"esG should have higher houseprices

)apitali/ation o% Fiscal i%%erences into ouse

*rices


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E23E,)E( Evidence %or )apitali/ation %rom

)ali%ornia4s *roposition 15

10."

Californias 'roposition -+ became law in-894

o Set the ma"imum amount of any ta" onproperty at -H of the Ifull cash valueJ

o Full cash valueB Kalue as of -892, withannual increases of 1H at most

Reduced property ta"es immensely in someareas, little change in others


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10."

!ach (- of property ta" reduction increasedhouse values by about (9, about e#ual tothe '7K of a permanent (- ta" cut

.n principle, the fall in property ta"es wouldresult in a future reduction in public goodsand services, which would lower homevalues

The fact that house prices rose by almost

the present discounted value of the ta"essuggests that Californians did not thin$ thatthey would lose many valuable publicgoods and services when ta"es fell

E23E,)E( Evidence %or )apitali/ation %rom

)ali%ornia4s *roposition 15


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10."

Tiebout model implies that three factorsdetermine local public good provisionB

1. ,ax)-eneft linages:The relationshipbetween the ta"es people pay and thegovernment goods and services theyget in return

1 CrossEmunicipality spillovers in publicgoods

+ !conomy of scale in public goodprovision

.f ta"es and bene;ts are lin$ed, and thereare no spillovers or economies of scale,

then local public good provision is close to

6ptimal Fiscal Federalism


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.f ta"es and bene;ts are lin$ed, and thereare no spillovers or economies of scale,then local public good provision is close tooptimal

Otherwise, further intervention may becalled for

Actual ;scal federalism does not necessarilyline upB

o Are there enormousspillovers)e"ternalities in education@

6ptimal Fiscal Federalism


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10.5

!normous ine#uality in revenue acrossmunicipalitiesB

>eston, &A raises (1-,++3)student while%a$eville raises (--,4

Should we care@

o .f Tiebout is right, then this reLectsoptimal sorting and ;nancing

o

ut if not, redistribution might be calledfor

o The main tool of redistribution isintergovernmental grants, cash transfersfrom one level of government to another

$edistribution across )ommunities


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10.5

:rants come in multiple forms, with di=erentimplications

/loc grant: A grant of some amount withno mandate as to how it is spent

onditional -loc grant: A grant ofsome amount with a mandate as to how itis spent

atcing grant: A grant, the amount ofwhich is tied to the amount of spending bythe local community

'atching Grants


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10.5

&ools o% $edistribution( Grants


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10.5

'atching Grants


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10.5

7loc8 Grant

10 5


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10.5

)onditional 7loc8 Grant

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10.5

3mplications o% i%%erent Grant &pes

7i=erent grant types a=ect incentives indi=erent ways

&atching grants rotate out the budgetconstraint, acting li$e a subsidy

o 6elp with e"ternalities, since they aretargeted

loc$ grants shift out the entire budgetconstraint, raising spending on all goods

o :ood for redistribution

Conditional bloc$ grants only di=er frombloc$ grants if the amount of the grant isgreater than the initial educationalspending

10 5


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10.5

&ain $ind of local redistribution is school;nance e#uali


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10.5

7i=erent structures result in di=erent ta"prices

,ax price:For school e#uali


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10.5

The simple implies that conditional grantscrowdEout local spending oneEforEone 7othey@

%oo$ing at how states spend grant money,the ypaper eect seems to matterB IThemoney stic$s where it hitsJ

ut states that get grants are the ones thatli$e spending the most

And highway grants from the federalgovernment to states are determined bythe strength of the states politicalrepresentatives

E23E,)E( &he Flpaper E%%ect

10 5


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E23E,)E( &he Flpaper E%%ect

10.5

*night attempted to measure the importanceof the Lypaper e=ect

%oo$ed at how spending changes as statescongressional delegations gain or losepower

!ach additional (- of federal grant moneyincrease due to rising congressional powerleads to a (8 reduction in the states

own spending Additional studies also ;nd evidence

inconsistent with the Lypaper e=ect

10 5


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10.5

.f residents perceived that property ta"eswere Itoo highJ in California, why did theywait until -894 to lower them@

'roposition -+ actually a response to school

;nance e#uali


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10.:

Central governments collect only part oftotal ta" revenues and spend only part oftotal public spending

The Tiebout model suggests that the

spending should be done locally whenB

o Spending is on goods for which localpreferences are relatively similar

o &ost residents can bene;t from those

goods

)onclusion

10 :


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10.:

)onclusion

6igher levels of government may notbelieve the conclusions of the ideali

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Chapter 10 State and Local Government Expenditures