Intergovernmental Fiscal Relations

1
Intergovernmental Fiscal Relations
PA 546 Constantine Hadjilambrinos

• Lecture 12
• November 22, 2005

2
Correspondence
PA 546 Constantine Hadjilambrinos

• 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
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.
• It does not make sense for labor-intensive
  services.
• It only makes sense for production of services.

5
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.

6
Fiscal disparity
PA 546 Constantine Hadjilambrinos

• 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
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.
• 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
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.

9
Categorical Grants
PA 546 Constantine Hadjilambrinos

• They finance specific and narrowly-defined
  programs.
• Administrative complexity.
• Program overlap and duplication.
• Distortion of local priorities.

10
Block Grants
PA 546 Constantine Hadjilambrinos

• They finance activities in broad functional
  areas.
• Fewer strings attached.
• Less control by grantor.

11
Revenue Sharing
PA 546 Constantine Hadjilambrinos

• General program fiscal assistance.
• No strings attached.
• Federal program ended in 1986.

12
School Aid from States
PA 546 Constantine Hadjilambrinos

• Tradition of local control of primary and
  secondary education.
• Substantial differences among localities in
  preferences and in resources.
• Flat grantsEvery 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 baseEqualizes amount districts
  would raise at the same tax rate.

13
Mandates
PA 546 Constantine Hadjilambrinos

• 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.