Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 1 of 30 State and Local Government Expenditures 10.1 Fiscal.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 1 of 30 State and Local Government Expenditures 10.1 Fiscal Federalism in the United States and Abroad 10.2 Optimal Fiscal Federalism 10.3 Redistribution across Communities 10.4 Conclusion

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 2 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S optimal fiscal federalism The question of which activities should take place at which level of government.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 3 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.1 Spending and Revenue of State and Local Governments Fiscal Federalism in the United States and Abroad

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 4 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.1 Fiscal Federalism Abroad fiscal equalization Policies by which the national government distributes grants to subnational governments in an effort to equalize differences in wealth. Fiscal Federalism in the United States and Abroad  TABLE 10-2

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 5 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 5 Types of Taxation 18. 1

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 6 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S Fiscal Federalism in the United States and Abroad 10.1  FIGURE 10-1

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 7 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.1 Spending and Revenue of State and Local Governments property tax The tax on land and any buildings on it, such as commercial businesses or residential homes. Fiscal Federalism in the United States and Abroad intergovernmental grants Payments from one level of government to another.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 8 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 8 The Property Tax In 2006, $320 billion collected in property taxes, almost all at the local level. Plays key role in local public finance. In many western states with public lands, feds make payment in lieu of taxes Many non-profits also make payments in lieu of taxes

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 10 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10 The Property Tax Table 20.2 shows that effective tax rates on residential property vary widely.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 11 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 11 Property tax and local governments 87,500 local governments in 2002 Census Special districts increasing “reserved powers” clause of 10 th amendment to US Constitution States can permit anything not excluded by Feds Local governments are creatures of State govt. Diversity of local government related to history, settlement patterns and state legislatures

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 12 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 12 Local government trends Local government structure continues to evolve De-volution or de-centralization trends Number and scope of local governments Style of state legislature Political culture of the state. Local government will continue to be important Local government revenue will be needed Property tax will continue to be important

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 13 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 13 History of property taxes American system of local property taxes originates with British traditions Importance linked to growth of frontier Feasible source of revenue Equal taxation of wealth Overlapping and special districts had revenue sources Colonial era had several taxes Excise and tariffs Post revolutionary war saw a uniformity clause added to property taxation

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 14 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 14 Property taxes Property taxes applied to real estate and personal property Individuals paid for government services in proportion to their wealth

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 15 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 15 Evolution of the property tax system In agricultural economy, wealth mostly tied to land and buildings In modern commercial society, wealth in many other forms (stocks, bonds, investments, Local assessors often played favorites with property valuations Auditor, treasurer are separate elected offices Wages and earnings as new form of wealth Increased demands for revenues for services

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 16 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 16 Property tax history Post WW2 saw dramatic changes in growth and demand for services Assessments and revenues grew Local programs and services also grew

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 17 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 17 California Tax Revolt Proposition 13 Froze assessments at 1975 levies (until next transaction) Ceiling on the property tax rate any locality could impose Forbade localities raising property taxes without a 2/3 majority State stepped in with more revenue sharing

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 18 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 18 Why property taxes are controversial in US and Iowa Property tax is highly visible Perceived as regressive May be more accessible for changing Iowa has uneven effective rates across classes of property

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 20 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 20 Iowa property tax system Tax on real property in 5 classes Residential Agricultural Commercial Industrial Utilities

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 22 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 22 Property taxes Properties are assessed every two years Each county has an assessor, towns over 10,000 may have their own How do they assess? Based on market valuation Recent sales, comparable properties Assessments summed for each class of property State Dept. of Revenue equalizes among jurisdictions

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 23 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 23 Assessment process Budgets are established Tax rates are established Credits subtracted Homestead, disabled, farmstead, veterans Rollbacks applied Levy and consolidated levy Roles of assessor, auditor, treasurer Opportunities for appeal

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 24 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 24 Property taxes: Rollbacks —30 years ago high inflation led to limitations on valuation increases -residential and ag land received limitation formula Ag land assessed on productivity Statewide valuations limited to 4% for these 2 classes Rollback from assessed valuations gives taxable valuation. Residential rollback at 44.08% currently

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 28 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 28 Property tax reform proposal Steady growth of rollback percentage means property tax bill shifting to commercial and industrial classes Businesses want tax relief HF2771 proposes to limit increases to commercial and industrial by linking increases across classes Begin rollback on commercial property

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 32 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 32 Assessment of Iowa Taxes Very average in terms of per capita and per income basis State and local taxes declining on a per income basis Slight increase on a percapita basis Percapita spending also very average

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 34 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 34 Redistribution Across Communities 10. 3 There is currently enormous inequality in both the ability of local communities to finance public goods and the extent to which they do so. Should We Care? It depends on the extent to which the Tiebout model describes reality. Tools of Redistribution: Grants If higher levels of government decide to redistribute across lower levels of government, they do so through intergovernmental grants.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 35 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 35 Intergovernmental Grants Federal grants important source of revenue to states and localities. Grants from federal and state government are about 34% of total local general revenues.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 37 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 37 Table 1. State and Local Government Finances by Level of Government and by State: 2003-04 (Dollar amounts are in thousands. Coefficients of variation (CV) are expressed as percents. For meaning of abbreviations and symbols, see note below table.) Description Iowa State & local State Local government amount 1 CVamountamount 1 CV 12345 Population (July 2004, in thousands)2,953(X)2,953 (X) Revenue 1 22,544,5650.1715,363,01510,639,5210.43 General revenue 1 18,396,3430.2011,916,7039,937,6110.45 Intergovernmental revenue 1 4,304,2250.164,038,2203,723,9760.86 From Federal Government4,304,2250.163,911,906392,3191.78 From State government 1 (1)0.0003,331,6570.93 From local governments 1 (1)0.00126,314(1)0.00 General revenue from own sources14,092,1180.257,878,4836,213,6350.56 Taxes9,018,7480.345,214,6023,804,1460.81 Property3,188,8690.4403,188,8690.44

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 39 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 39 Roles of Intergovernmental Grants Correct for externalities (services or tax costs cross boundaries Redistribution of resources among regions Substituting one tax structure for another Macroeconomic stabilizing tool (fiscal policy)

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 40 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 40 Economic effects of grants Income effects Increasing the resources available for local services Price effects Reducing marginal costs of providing the service

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 41 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 41 Intergovernmental Grants Essentially two types of grants: conditional and unconditional. Conditional grants Also known as categorical grants. Donor specifies the purposes for which the recipient may use the money. Usually earmarked Several types of conditional grants: Matching grant Matching closed-ended grant Nonmatching grant

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 42 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 42 Intergovernmental Grants Conditional grants Matching grant For every dollar given by the donor to support a particular activity, a certain sum must be expended by the recipient. Changes relative price of the public good, G. Figure 22.4 illustrates the potential effects.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 43 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S Figure 22.4

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 44 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 44 Intergovernmental Grants Conditional grants Matching closed-ended grant For every dollar given by the donor to support a particular activity, a certain sum must be expended by the recipient. Donor specifies ceiling, that is, a maximum contribution. Changes relative price of the public good, G, on part of the budget constraint. Budget constraint is non-linear. Figure 22.5 illustrates the potential effects.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 46 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 46 Intergovernmental Grants Conditional grants Nonmatching grant Donor gives fixed sum of money with the stipulation that it is spent on public good. Does not change the relative price of the public good, G. Budget constraint is nonlinear. Figure 22.6 illustrates the potential effects.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 48 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 48 Intergovernmental Grants Unconditional grants (Block grant) Sometimes referred to as revenue sharing. Money is unrestricted. Similar to budget constraint in Figure 22.6, except that the budget line is now JM rather than AHM.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 50 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.2 Optimal Fiscal Federalism The Tiebout Model What is it about the private market that guarantees optimal provision of private goods that is missing in the case of public goods? Tiebout ’ s insight was that the factors missing from the market for public goods were shopping and competition. The situation is different when public goods are provided at the local level by cities and towns. Competition will naturally arise because individuals can vote with their feet: if they don ’ t like the level of public goods provision in one town, they can move to the next town. This threat of exit can induce efficiency in local public goods production.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 51 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.2 Optimal Fiscal Federalism The Tiebout Model The Format Model The main message of the model is that competition across local jurisdictions places competitive pressures on the provision of local public goods.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 52 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.2 Optimal Fiscal Federalism Problems with the Tiebout Model Problems with Tiebout Competition The Tiebout model requires a number of assumptions that may not hold in reality:  Individuals must not only want to vote with their feet, they must be able to actually carry out that vote.  Individuals have perfect information on the benefits they receive from the town and the taxes they pay.  Individuals must be able to freely choose among a range of towns that might match my taste for public goods.  The provision of some public goods requires sufficient scale or size.  There must be enough towns so that individuals can sort themselves into groups with similar preferences for public goods.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 53 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.2 Optimal Fiscal Federalism Problems with the Tiebout Model Problems with Tiebout Financing The Tiebout model requires equal financing of the public good among all residents. lump-sum tax A fixed taxation amount independent of a person’s income, consumption of goods and services, or wealth.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 54 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.2 Optimal Fiscal Federalism Problems with the Tiebout Model Problems with Tiebout Financing Towns typically finance their public goods instead through a property tax. The problem that property taxation causes is that the poor chase the rich. zoning Restrictions that towns place on the use of real estate. Zoning regulations protect the tax base of wealthy towns by pricing lower-income people out of the housing market.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 55 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.2 Optimal Fiscal Federalism Problems with the Tiebout Model No Externalities/Spillovers The Tiebout model assumes that public goods have effects only in a given town and that the effects do not spill over to neighboring towns. Many local public goods have similar externality or spillover features: police; public works; education.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 56 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.2 Optimal Fiscal Federalism Evidence on the Tiebout Model Resident Similarity across Areas A testable implication of the Tiebout model is that when people have more choice of local community, the tastes for public goods will be more similar among town residents than when people do not have many choices.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 57 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.2 house price capitalization Incorporation into the price of a house the costs (including local property taxes) and benefits (including local public goods) of living in the house. Optimal Fiscal Federalism Evidence on the Tiebout Model Capitalization of Fiscal Differences into House Prices People not only vote with their feet, they also vote with their pocketbook, in the form of house prices.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 58 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.2 EVIDENCE FOR CAPITALIZATION FROM CALIFORNIA’S PROPOSITION 13 Optimal Fiscal Federalism California’s Proposition 13 became law in 1978. Proposition 13 mandated that the maximum amount of any tax on property could not exceed 1% of the “full cash value” of the property. The full cash value was defined as the value as of 1976, with annual increases of 2% at most. Each $1 of property tax reduction increased house values by about $7. Full capitalization of lower property taxes into house prices would imply that house prices should rise by the present discounted value of reduced future tax payments. In principle, the fall in property taxes would result in a future reduction in public goods and services, which would lower home values. The fact that house prices rose by almost the present discounted value of the taxes suggests that Californians did not think that they would lose many valuable public goods and services when taxes fell. M P I R I C A L E V I D E N C E E

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 59 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.2 Optimal Fiscal Federalism tax-benefit linkages The relationship between the taxes people pay and the government goods and services they get in return.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 60 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.3 Redistribution across Communities Should We Care? There is currently enormous inequality in both the ability of local communities to finance public goods and the extent to which they do so. It depends on the extent to which the Tiebout model describes reality. Tools of Redistribution: Grants If higher levels of government decide to redistribute across lower levels of government, they do so through intergovernmental grants.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 61 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.3 Redistribution across Communities Tools of Redistribution: Grants  FIGURE 10-2

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 62 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.3 Matching Grants Redistribution across Communities Tools of Redistribution: Grants matching grant A grant, the amount of which is tied to the amount of spending by the local community.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 63 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.3 Matching Grants Redistribution across Communities Tools of Redistribution: Grants  FIGURE 10-3

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 64 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.3 Block Grant Redistribution across Communities Tools of Redistribution: Grants block grant A grant of some fixed amount with no mandate on how it is to be spent.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 65 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.3 Block Grant Redistribution across Communities Tools of Redistribution: Grants  FIGURE 10-4

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 66 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.3 Conditional Block Grant Redistribution across Communities Tools of Redistribution: Grants conditional block grant A grant of some fixed amount with a mandate that the money be spent in a particular way.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 67 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.3 Conditional Block Grant Redistribution across Communities Tools of Redistribution: Grants  FIGURE 10-5

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 68 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.3 Redistribution across Communities Redistribution in Action: School Finance Equalization school finance equalization Laws that mandate redistribution of funds across communities in a state to ensure more equal financing of schools.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 69 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.3 Redistribution across Communities M P I R I C A L E V I D E N C E E THE FLYPAPER EFFECT Hines and Thaler found that the crowd-out of state spending by federal spending is low and often close to zero. Economist Arthur Okun described this as the flypaper effect because “the money sticks where it hits” instead of replacing state spending. As Knight noted, states that get grants are the ones that like spending the most. He also noted that highway grants from the federal government to states are determined by the strength of the state’s political representatives. Knight compared the level of spending in treatment states that see increases in the power of their congressional delegations with the level of spending in control states that see decreases in the power of their congressional delegations. He found that each additional $1 of federal grant money increase due to rising congressional power leads to a $0.90 reduction in the state’s own spending. Additional studies also find evidence inconsistent with the flypaper effect, suggesting that the traditional conclusion of substantial crowd-out from block grants is supported by the evidence.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 70 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.3 tax price For school equalization schemes, the amount of revenue a local district would have to raise in order to gain $1 more of spending. Redistribution across Communities The Structure of Equalization Schemes School finance equalization schemes can take very different forms. Some states have systems that attempt to completely or nearly completely equalize spending across school districts. The Effects of Equalization Redistribution in Action: School Finance Equalization

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 71 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.3 Redistribution across Communities School Finance Equalization and Property Tax Limitations in California  APPLICATION  If residents perceived that property taxes were “too high” in California, why did they wait until 1978 to lower them? Proposition 13 was actually a response to a court case that led to school finance equalization in California. The key feature of this decision was that it broke the link between local property taxes and spending on schools. Taxes were no longer a price: they were just taxes. As a result, it was natural for communities to vote to lower taxes, since they did not perceive any benefit from them anymore. Wealthy voters would have opposed Proposition 13 in the absence of the school finance equalization because their high taxes were paying for schooling they desired for their town without subsidizing anyone else’s schooling. Thus, these wealthy taxpayers were happy to approve Proposition 13.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 72 of 30 C H A P T E R 1 0 ■ S T A T E A N D L O C A L G O V E R N M E N T E X P E N D I T U R E S 10.4 Conclusion In every country, the central government collects only part of the total national tax revenues and does only part of the national public spending. When spending is on goods for which local preferences are relatively similar, and where most residents can benefit from those goods, the Tiebout model suggests that the spending should be done locally. When spending is for goods that benefit only a minority of the population, the Tiebout model suggests that it might be difficult to do this spending locally because the majority of people who do not benefit will “vote with their feet” and move elsewhere. Higher levels of government may not believe the conclusions of the idealized Tiebout model, in which case they will want to redistribute across lower levels of government. If the higher-level government decides that it wants to redistribute across lower levels, it can do so through several different types of grants.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 1 of 30 State and Local Government Expenditures 10.1 Fiscal.

Similar presentations

Presentation on theme: "Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 1 of 30 State and Local Government Expenditures 10.1 Fiscal."— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 1 of 30 State and Local Government Expenditures 10.1 Fiscal.

Similar presentations

Presentation on theme: "Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 1 of 30 State and Local Government Expenditures 10.1 Fiscal."— Presentation transcript:

Similar presentations

About project

Feedback