L18: State and Local Public Finance Flashcards
three primary factors behind the change in the composition of government spending
16th amendment allowed the federal government to levy income taxes on citizens
new deal programs of 1930s in response to great depression
introduction of social insurance and welfare programs
optimal fiscal feeralism
question of which activities should take place at which level of government
state/local government vs federal spending
spending on things like education and public safety primarily at state and local level
large old age entitlement programs and national defense provided federally
state government revenue
sales and income taxes primarily
local government revenue
property taxes (about 1/2)
tiebout model
variation in levels of public goods and services by local governments can lead to optimal provision
people choose where to live based on the attributes available - substitutes for the market in the same way a market works in providing signals
tiebout model assumptions
people are perfectly mobile across towns
people have full information on taxes and benefits
local public goods are rival goods beyond some population level
enough towns so individuals can sort themselves into goods with similar public goods preferences
residents pay uniform tax
no externalities/spillovers
tiebout theorem
if all assumptions are satisfied, competition leads to optimal provision of public goods
people move freely and pick their preferred locality
- people with similar tastes end up together
public goods provision mimics characteristics of private goods provision
tiebout equilibrium
each town has people who have the same desired level of the public good and pay the same amount of it
public goods provision is efficient - samuelson rule holds
- also lindahl prices since identical tastes
limits of the tiebout model
doesn’t hold for public goods where it is efficient to keep adding individuals in, like national defense
doesn’t hold when there are spillovers
local governments don’t use lump sum taxes
mechanisms that affect property taxes
zoning
housing prices
- valuable public goods cause housing prices to go up
implications of the tiebout model: capitalisation of fiscal differences in house prices
differences in public goods and taxes should be reflected in house prices, since these attributes are associated with living in a jurisdiction
high property taxes relative to public goods quality depresses housing prices, low property taxes relative to public goods quality should increase housing prices
tiebout model and optimal fiscal federalism
tax-benefit linkages
- goods with strong tax benefit linkages should be provided locally
cross-municipality spillovers
- if local public goods have large spillover effects on other communities, the goods will be underprovided by any locality
economies of scale
- public goods with large EOS are not efficiently provided by many competing local jurisdictions
redistribution across communities
high level governments (federal and state) can redistribute directly to individuals, but also can do so indirectly through intergovernmental grants
types of grants
matching
- amount is tied to the amount of spending by the local community
block
- grant of some fixed amount with no mandate on how it is to be spent
categorical block grant
- grant of some fixed amount with a mandate that the money be spent in a particular way
