Intergovernmental Fiscal Relations: Diversity and Coordination Troy University PA6650- Governmental Budgeting Chapter 14

Overview • Federal, state, and local governments interact • Each level has powers and authorities • Each level has its own electorate – diversity • Each level has the power to tax, power to spend • Completely independent levels wouldn’t work • To what extent centralization?

Correspondence & Subsidiarity • Used in determining which level of government should provide a benefit • CORRESPONDENCE PRINCIPLE – benefit matches constituency – Spillover is a mismatch where benefits go to those who don’t pay • Private goods have no spillover • Parks and stadiums have some spillover • Large spillover is costly to the jurisdiction

Correspondence & Subsidiarity • PRINCIPLE OF SUBSIDIARITY – Governmental responsibility for a function should be at the lowest government level that can deliver the function efficiently

Economic Advantage From Bigness • If cost per person decreased as size increased, could we have larger governments operating more economically?

• Two problems with this “economies of scale” logic – Most traditional services don’t offer economies of scale (unit costs are relatively constant) – If production by privatization is feasible, scale is irrelevant (families don’t build their own cars)

Fiscal Disparity • State per capita income varies significantly – $25K in Mississippi, $45K in Connecticut – More affluent states can provide more services…inequity • Because of this mismatch between need and capacity to finance needed services, higher governments intervene with fiscal assistance • City – suburb issue

Coordination and Assistance: Tax Systems • Two classes of revenue relationship – Relief in tax-base use – Help with revenue administration and compliance

Coordination and Assistance: Tax Systems • Relief in Tax-Base Use – Revenue relief – deductions and credits in one unit for another unit • e.g., federal deductions for state and local taxes – Tax credits - the tax levied by one government unit acts as full or partial payment on the liability owed to another government • e.g., federal tax on transfer at death

Coordination and Assistance: Tax Systems • More revenue tools – Source separation (prevents tax overlapping) • Vertical overlapping (feds v. state) – e.g., competition for income taxation or sales taxation • Horizontal overlapping (two different states) – e.g., North Carolinians working in Virginia – Cooperative Administration / Coordinated Tax Bases • State income taxes based on federal returns • Sharing of information – Tax supplements • e.g., city sales tax added to state sales tax – Central administration • State, county, and local tax collectively administered by state

Coordination and Assistance: Grants • Grants transfer spending power from one government to another • Donor raises the money, recipient gets the benefit • Donor may attach “strings” to the grant • In 2001-2002, 31.5% of state revenue and 40% of local revenue was grant assistance from other levels of government • 1970s were the golden years • 3 types of grants - CATEGORICAL GRANTS, BLOCK GRANTS, GENERAL REVENUE SHARING • Page 553 Table 14-2

Coordination and Assistance: Grants • CATEGORICAL GRANTS – For specifically and narrowly defined programs – Can be a

project grant

or a

formula grant

• Project – at the discretion of the administrator • Formula – matching funds • Formula/project – combination – Disadvantages • Administrative complexity • Program overlap and duplication • Distort local priorities

Coordination and Assistance: Grants • BLOCK GRANTS – Distributed to general-purpose governments – Lots of discretion on how to spend it – 5 major block grants • Health • Crime control • Social services • Aid for the needy • Emergency management

Coordination and Assistance: Grants • BLOCK GRANTS – Advantages • Provide aid to needy governments, fiscal certainty of funds • Substantial discretion • Simplified administration, paperwork, and overhead • Facilitates intergovernmental & interfunctional coordination • Greater participation in decision making – Disadvantages • Help affluent communities as well as poor communities • Some misuse that is contrary to congressional intent

Coordination and Assistance: Grants • REVENUE SHARING – Distributes multiyear federal funds to states – Few restrictions – Based on population, urban population, tax effort, income tax effort, per capita income

Coordination and Assistance: Grants • REVENUE SHARING – Advantages • Strengthened local spending power • Reduced intergovernmental fiscal disparity • Improved capacity to deliver services – Disadvantages • Not effective for disadvantaged groups because they all live within the same jurisdiction

Coordination and Assistance: States and School Aid • Primary and secondary education is traditionally local • State governments have responsibility for provision of education • Lots of fiscal disparity between school systems in a state • 3 systems to distribute state aid to schools

Coordination and Assistance: States and School Aid • Flat grants, general and categorical – Every district receives the same dollar amount per student • Foundation grants – Aid in direct proportion to the number of students and inversely with local property tax base per pupil. State determines a minimum acceptable “floor” or foundation • Guaranteed tax base – Makes up the difference between what was raised and what should have been raised on a district tax base. Guarantees that all districts will raise the same tax per pupil on a given tax rate

Coordination and Assistance: Mandates • A mandate is a constitutional provision, statute, administrative regulation, or judicial ruling. It comes from outside the affected government, but it requires compliance.

– Mandates are restrictive – Mandates change behavior – Mandates can prescribe: • Services and programs, or • Levels of input

Coordination and Assistance: Mandates • Case for: – Helps reduce bad spillover effects from irresponsible governments – Helps reduce inequity and provide uniform services • Case against: – Mandates often unfunded, creating fiscal stress – Mandates threaten other government programs – Mandates are enacted without cost sensitivity – Mandates restrict autonomy

Conclusion • We have a federal system with multiple levels of government • Diversity allows more choice • Coordination necessary because of: – Intergovernmental spillovers • Spillovers occur when action by one government impacts other neighbors – Fiscal imbalance • Caused by disparities in fiscal capacity • Relieved by – Tax systems – Grants – Mandates