Fiscal Federalism and Local Public Goods

1. Fiscal Federalism and Local Public Goods Good news?

2. Plan • Structure of the Federal Government in the U.S. • Local versus Global Public Goods • “A Pure Theory of Local Expenditures” • the assumptions and the set-up of the model • the results • applications

3. FISCAL FEDERALISM IN THE U.S. AND ABROAD • Early in the history of the United States, the federal government played a relatively limited role. • The last amendment of the Bill of Rights of the United States Constitution states: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.”

4. Figure 1 In 1902, the federal government accounted for only 34% of total government spending; local governments accounted for 58%. Federal government was responsible for national defense, foreign relations, judicial functions, and the postal service. State and local governments were responsible for education, police, roads, sanitation, welfare, health, hospitals, and so on. The role of the federal government grew with the introduction of the federal income tax and the New Deal programs of the Great Depression. The share of state financing coming from the federal government has grown because of joint program like cash welfare and Medicaid.

5. Division of responsibilities • The largest element of state and local spending is • Education • health care • public safety. • For federal spending, the largest elements are • health care • Social Security • national defense.

6. What are local governments? • In the 2002 Census of Governments, the Bureau of the Census identified a total 87,525 local governments.  Separated by the five categories used by the Bureau of Census, there are: • 19,429  Municipal governments; • 16,504  Town or Township governments; •   3,034  County governments; • 13,506  School districts; and • 35,052  Special district governments.

7. Municipal government • The term “municipal government” applies to what are commonly called cities or towns.  The Census Bureau defines “municipal governments” as: • “political subdivisions with which a municipal corporation has been established under state law to provide general local government for a specific population concentration in a defined area, and includes all active government units officially designated as cities, boroughs (except in Alaska), towns (except in the six New England States, and in Minnesota, New York, and Wisconsin) and villages.” 

8. Town or Township government • The distinction between municipal and township governments is based primarily on the historical circumstances.  Their responsibilities and the degree of autonomy vary based on each state.  

9. County government • Counties are authorized in state constitutions and statutes and provide general government services. Forty-eight of the fifty states have county governments, although they are called parishes in Louisiana and boroughs in Alaska.  Connecticut and Rhode Island are the two states without functioning county governments.

10. School Districts • School district governments are organized local entities providing public elementary, secondary, and/or higher education.  • The Census of Governments only counts independent school districts, which are the sole form of public schools in 33 states. • Four states, Alaska, Hawaii, Maine, and New Jersey, only have state-dependent school systems.

11. Special District government • Special district governments are independent, special-purpose governmental units that exist as separate entities with substantial administrative and fiscal independence from general-purpose governments.  • They provide specific services that are not being supplied by the general-purpose governments such as fire protection, water supply, or sewerage services.  In some cases, they have separate authority to tax and levy fees. • Source:2002 Census of Governments. Volume 1, Number 1, Government Organization. U.S. Department of Commerce, Bureau of the Census

12. Global Public Good

13. Local public goods

14. Local and Global Public Goods • Take a national view • Then national defense, environment are global public goods • Fire protection, parks, sidewalks are local public goods

15. A Pure Theory of Local Expenditures(Charles Tiebout, The Journal of Political Economy. v.64 Oct., 1956 pp.416-424) • There is an infinite number of communities • Consumer-voters are fully mobile and will move to that community where their preference patterns are best satisfied • Consumer-voters have full knowledge about the revenue and expenditure patterns in the communities • Restrictions due to employment opportunities are not considered • The public services exhibit no external economies or diseconomies between communities • Public services are congestible.

16. Analogy with the market for private goods • Consumers that have identical demand can form groups and send their representative (a middle-man) to the supplier (producer) to buy the goods for them. They agree to share the cost equally (each one of them gets the same amount of the good). • This will lead to the same outcome as if each one of the consumers would have gone to buy the good on their own.

17. Results • A consumer-voter “votes with his feet”: he selects community that suits his preferences the best, in other words he selects the best public services/taxes package given his preferences and income. • If his favorite community is “over-populated” or congested, he will turn to another community having the same qualities with smaller population. • Local public goods will be provided efficiently.