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Intergovernmental Fiscal Relations

PA 546 Constantine Hadjilambrinos. Intergovernmental Fiscal Relations. Lecture 12 November 22, 2005. PA 546 Constantine Hadjilambrinos. Correspondence. Identifies level of government that should provide a service.

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Intergovernmental Fiscal Relations

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

  2. 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. • This is almost never practical, especially as it makes little sense to have a special jurisdiction for each and every public good.

  3. PA 546 Constantine Hadjilambrinos Subsidiarity 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.

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

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

  6. PA 546 Constantine Hadjilambrinos Fiscal disparity • Regional disparities in revenue production capacity exist. • 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.

  7. PA 546 Constantine Hadjilambrinos Coordination and Assistance: Tax Systems • 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. • 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.

  8. PA 546 Constantine Hadjilambrinos Coordination and Assistance: Grants 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.

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

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

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

  12. PA 546 Constantine Hadjilambrinos School Aid from States • 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. • 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.

  13. PA 546 Constantine Hadjilambrinos Mandates • Address externalities of lower-level of government action or inaction. • Provide greater uniformity. • Costs of mandates can impact provision of non-mandated services. • No cost-benefit considerations. 1995 Unfunded Mandates Reform Act.

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