Intergovernmental Fiscal Relations: Diversity and Coordination Troy University PA6650- Governmental Budgeting Chapter 14

Overview Federal, state, and local governments interact Each level has powers and authorities Each level has its own electorate – diversity Each level has the power to tax, power to spend Completely independent levels wouldn’t work To what extent centralization?

Correspondence & Subsidiarity Used in determining which level of government should provide a benefit CORRESPONDENCE PRINCIPLE – benefit matches constituency –Spillover is a mismatch where benefits go to those who don’t pay Private goods have no spillover Parks and stadiums have some spillover Large spillover is costly to the jurisdiction

Correspondence & Subsidiarity PRINCIPLE OF SUBSIDIARITY –Governmental responsibility for a function should be at the lowest government level that can deliver the function efficiently

Economic Advantage From Bigness If cost per person decreased as size increased, could we have larger governments operating more economically? Two problems with this “economies of scale” logic –Most traditional services don’t offer economies of scale (unit costs are relatively constant) –If production by privatization is feasible, scale is irrelevant (families don’t build their own cars)

Fiscal Disparity State per capita income varies significantly –$25K in Mississippi, $45K in Connecticut –More affluent states can provide more services…inequity Because of this mismatch between need and capacity to finance needed services, higher governments intervene with fiscal assistance City – suburb issue

Coordination and Assistance: Tax Systems Two classes of revenue relationship –Relief in tax-base use –Help with revenue administration and compliance

Coordination and Assistance: Tax Systems Relief in Tax-Base Use –Revenue relief – deductions and credits in one unit for another unit e.g., federal deductions for state and local taxes –Tax credits - the tax levied by one government unit acts as full or partial payment on the liability owed to another government e.g., federal tax on transfer at death

Coordination and Assistance: Tax Systems More revenue tools –Source separation (prevents tax overlapping) Vertical overlapping (feds v. state) –e.g., competition for income taxation or sales taxation Horizontal overlapping (two different states) –e.g., North Carolinians working in Virginia –Cooperative Administration / Coordinated Tax Bases State income taxes based on federal returns Sharing of information –Tax supplements e.g., city sales tax added to state sales tax –Central administration State, county, and local tax collectively administered by state

Coordination and Assistance: Grants Grants transfer spending power from one government to another Donor raises the money, recipient gets the benefit Donor may attach “strings” to the grant In , 31.5% of state revenue and 40% of local revenue was grant assistance from other levels of government 1970s were the golden years 3 types of grants - CATEGORICAL GRANTS, BLOCK GRANTS, GENERAL REVENUE SHARING Page 553 Table 14-2

Coordination and Assistance: Grants CATEGORICAL GRANTS –For specifically and narrowly defined programs –Can be a project grant or a formula grant Project – at the discretion of the administrator Formula – matching funds Formula/project – combination –Disadvantages Administrative complexity Program overlap and duplication Distort local priorities

Coordination and Assistance: Grants BLOCK GRANTS –Distributed to general-purpose governments –Lots of discretion on how to spend it –5 major block grants Health Crime control Social services Aid for the needy Emergency management

Coordination and Assistance: Grants BLOCK GRANTS –Advantages Provide aid to needy governments, fiscal certainty of funds Substantial discretion Simplified administration, paperwork, and overhead Facilitates intergovernmental & interfunctional coordination Greater participation in decision making –Disadvantages Help affluent communities as well as poor communities Some misuse that is contrary to congressional intent

Coordination and Assistance: Grants REVENUE SHARING –Distributes multiyear federal funds to states –Few restrictions –Based on population, urban population, tax effort, income tax effort, per capita income

Coordination and Assistance: Grants REVENUE SHARING –Advantages Strengthened local spending power Reduced intergovernmental fiscal disparity Improved capacity to deliver services –Disadvantages Not effective for disadvantaged groups because they all live within the same jurisdiction

Coordination and Assistance: States and School Aid Primary and secondary education is traditionally local State governments have responsibility for provision of education Lots of fiscal disparity between school systems in a state 3 systems to distribute state aid to schools

Coordination and Assistance: States and School Aid Flat grants, general and categorical –Every district receives the same dollar amount per student Foundation grants –Aid in direct proportion to the number of students and inversely with local property tax base per pupil. State determines a minimum acceptable “floor” or foundation Guaranteed tax base –Makes up the difference between what was raised and what should have been raised on a district tax base. Guarantees that all districts will raise the same tax per pupil on a given tax rate

Coordination and Assistance: Mandates A mandate is a constitutional provision, statute, administrative regulation, or judicial ruling. It comes from outside the affected government, but it requires compliance. –Mandates are restrictive –Mandates change behavior –Mandates can prescribe: Services and programs, or Levels of input

Coordination and Assistance: Mandates Case for: –Helps reduce bad spillover effects from irresponsible governments –Helps reduce inequity and provide uniform services Case against: –Mandates often unfunded, creating fiscal stress –Mandates threaten other government programs –Mandates are enacted without cost sensitivity –Mandates restrict autonomy

Conclusion We have a federal system with multiple levels of government Diversity allows more choice Coordination necessary because of: –Intergovernmental spillovers Spillovers occur when action by one government impacts other neighbors –Fiscal imbalance Caused by disparities in fiscal capacity Relieved by –Tax systems – Grants –Mandates