chapter 10 state and local government expenditures
TRANSCRIPT
-
7/25/2019 Chapter 10 State and Local Government Expenditures
1/34
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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
2/34
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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
3/34
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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
4/34
10.1
State and Local Spending in the United States
1!0"#"010
-
7/25/2019 Chapter 10 State and Local Government Expenditures
5/34
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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
6/34
10.1
Spending and $evenue o% State and Local
Governments
Spending even!e
State
()'C State
()'C
!ducationspending
A* +,- .ncome ta"es
/0 1,+--&A 1,23+ &T 453
T/ -,5 &any
6ealthcarespending
7C -,+38
Salesta"es
7C -,439
%A 2,958 .owa 284
UT 5,+- &any
-
7/25/2019 Chapter 10 State and Local Government Expenditures
7/34
10.1
Fiscal Federalism Abroad
Spending"# oall$
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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
8/34
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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
9/34
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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
10/34
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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
11/34
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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
12/34
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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
13/34
10."
To $eep poor people from chasing rich people,towns enact
-
7/25/2019 Chapter 10 State and Local Government Expenditures
14/34
10."
The Tiebout model assumes that publicgoods have e=ects only in a given town andthat the e=ects do not spill over toneighboring towns
&any local public goods have similare"ternality or spillover featuresB police,public wor$s, education
.f there are spillovers, then lowEta", lowE
bene;t municipalities can freeEride o= ofhighEta", highEbene;t ones
,o Externalities-Spillovers
-
7/25/2019 Chapter 10 State and Local Government Expenditures
15/34
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
$esident Similarit Across Areas
-
7/25/2019 Chapter 10 State and Local Government Expenditures
16/34
10."
'eople not only vote with their feet, they alsovote with their poc$etboo$, in the form ofhouse prices
+o!se price capitali'ation: .ncorporationinto the price of a house the costsincluding local property ta"esG and bene;tsincluding local public goodsG of living in thehouse
Areas with relatively generous public goodsgiven ta"esG should have higher houseprices
)apitali/ation o% Fiscal i%%erences into ouse
*rices
-
7/25/2019 Chapter 10 State and Local Government Expenditures
17/34
E23E,)E( Evidence %or )apitali/ation %rom
)ali%ornia4s *roposition 15
10."
Californias 'roposition -+ became law in-894
o Set the ma"imum amount of any ta" onproperty at -H of the Ifull cash valueJ
o Full cash valueB Kalue as of -892, withannual increases of 1H at most
Reduced property ta"es immensely in someareas, little change in others
-
7/25/2019 Chapter 10 State and Local Government Expenditures
18/34
10."
!ach (- of property ta" reduction increasedhouse values by about (9, about e#ual tothe '7K of a permanent (- ta" cut
.n principle, the fall in property ta"es wouldresult in a future reduction in public goodsand services, which would lower homevalues
The fact that house prices rose by almost
the present discounted value of the ta"essuggests that Californians did not thin$ thatthey would lose many valuable publicgoods and services when ta"es fell
E23E,)E( Evidence %or )apitali/ation %rom
)ali%ornia4s *roposition 15
-
7/25/2019 Chapter 10 State and Local Government Expenditures
19/34
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$ed, and thereare no spillovers or economies of scale,
then local public good provision is close to
6ptimal Fiscal Federalism
-
7/25/2019 Chapter 10 State and Local Government Expenditures
20/34
10."
.f ta"es and bene;ts are lin$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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
21/34
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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
22/34
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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
23/34
10.5
&ools o% $edistribution( Grants
-
7/25/2019 Chapter 10 State and Local Government Expenditures
24/34
10.5
'atching Grants
-
7/25/2019 Chapter 10 State and Local Government Expenditures
25/34
10.5
7loc8 Grant
10 5
-
7/25/2019 Chapter 10 State and Local Government Expenditures
26/34
10.5
)onditional 7loc8 Grant
10 5
-
7/25/2019 Chapter 10 State and Local Government Expenditures
27/34
10.5
3mplications o% i%%erent Grant &pes
7i=erent grant types a=ect incentives indi=erent ways
&atching grants rotate out the budgetconstraint, acting li$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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
28/34
10.5
&ain $ind of local redistribution is school;nance e#uali
-
7/25/2019 Chapter 10 State and Local Government Expenditures
29/34
10.5
7i=erent structures result in di=erent ta"prices
,ax price:For school e#uali
-
7/25/2019 Chapter 10 State and Local Government Expenditures
30/34
10.5
The simple implies that conditional grantscrowdEout local spending oneEforEone 7othey@
%oo$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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
31/34
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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
32/34
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
-
7/25/2019 Chapter 10 State and Local Government Expenditures
33/34
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 :
-
7/25/2019 Chapter 10 State and Local Government Expenditures
34/34
10.:
)onclusion
6igher levels of government may notbelieve the conclusions of the ideali