Intergovernmental Fiscal Relations Lecture 12 November 22, 2005 PA 546 Constantine Hadjilambrinos

Correspondence Identifies level of government that should provide a service. For each public good, the jurisdiction providing the good should include precisely the set of individuals that consume the good. For each public good, the jurisdiction providing the good should include precisely the set of individuals that consume the good. This is almost never practical, especially as it makes little sense to have a special jurisdiction for each and every public good. This is almost never practical, especially as it makes little sense to have a special jurisdiction for each and every public good.

PA 546 Constantine Hadjilambrinos Governmental responsibility for a function or provision of a certain public good should be at the lowest level of government that can deliver it effectively. Subsidiarity

Higher levels of government often argue that they should deliver services because of economies of scale. PA 546 Constantine Hadjilambrinos The economies of scale argument makes sense for capital-intensive services. The economies of scale argument makes sense for capital-intensive services. It does not make sense for labor-intensive services. It does not make sense for labor-intensive services. It only makes sense for production of services. It only makes sense for production of services.

Economies of scope PA 546 Constantine Hadjilambrinos It makes little sense to have a separate special unit of government for each service or public good. It makes little sense to have a separate special unit of government for each service or public good.

Fiscal disparity PA 546 Constantine Hadjilambrinos Regional disparities in revenue production capacity exist. Regional disparities in revenue production capacity exist. Higher levels of government can ameliorate disparities through redistribution of revenue to lower levels. Higher levels of government can ameliorate disparities through redistribution of revenue to lower levels. Sometimes lower levels of government can cooperate in raising revenue through agreements such as regional tax-base sharing. Sometimes lower levels of government can cooperate in raising revenue through agreements such as regional tax-base sharing.

Coordination and Assistance: Tax Systems PA 546 Constantine Hadjilambrinos Relief in tax base use — Deductions and credits for tax paid to one unit in tax owed to another unit. Relief in tax base use — Deductions and credits for tax paid to one unit in tax owed to another unit. Assistance with revenue administration and compliance. Assistance with revenue administration and compliance.  Separation of sources (to prevent overlapping).  Cooperative administration — Continuous contact and exchange of information.  Coordinated tax bases — Linkages of tax structures.  Tax supplements — Lower level rate added to tax base of higher level of government or use rate that is a percentage of higher level tax.  Central administration — Tax collection at one level used by others.

Coordination and Assistance: Grants PA 546 Constantine Hadjilambrinos Transfer of revenue from one level to another. Conflict: Recipient has little incentive to use funds effectively. Controls — “Strings attached” But… Grantor has little knowledge of conditions at “local” level.

Categorical Grants PA 546 Constantine Hadjilambrinos They finance specific and narrowly-defined programs. Administrative complexity. Administrative complexity. Program overlap and duplication. Program overlap and duplication. Distortion of local priorities. Distortion of local priorities.

Block Grants PA 546 Constantine Hadjilambrinos They finance activities in broad functional areas. Fewer strings attached. Fewer strings attached. Less control by grantor. Less control by grantor.

Revenue Sharing PA 546 Constantine Hadjilambrinos General program fiscal assistance. No strings attached. No strings attached. Federal program ended in Federal program ended in 1986.

School Aid from States PA 546 Constantine Hadjilambrinos Tradition of local control of primary and secondary education. Tradition of local control of primary and secondary education. Substantial differences among localities in preferences and in resources. Flat grants—Every district receives same amount per pupil. Flat grants—Every district receives same amount per pupil. Foundation grants—(3/4 of states) In proportion to student population & inverse proportion to local property tax base per pupil. Foundation grants—(3/4 of states) In proportion to student population & inverse proportion to local property tax base per pupil. Guaranteed tax base—Equalizes amount districts would raise at the same tax rate. Guaranteed tax base—Equalizes amount districts would raise at the same tax rate.

Mandates PA 546 Constantine Hadjilambrinos Address externalities of lower-level of government action or inaction. Address externalities of lower-level of government action or inaction. Provide greater uniformity. Provide greater uniformity. Costs of mandates can impact provision of non- mandated services. No cost-benefit considerations Unfunded Mandates Reform Act.