Transcript Trends in 3rd Class County Budgets: Some Implications for

Judith I. Stallmann, Professor
University of Missouri
Dr. Eunice Patron
Gaithersburg, MD
Community Development Extension
Agricultural and Applied Economics
Rural Sociology
Public Affairs
[email protected]
Third International Conference on Local Government
Khon Kaen University, Thailand. November 15-18, 2012
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A large literature focuses on relations
between different levels of government.
My focus today is on relationships between
local governments.
 They are equals in terms of their powers and
responsibilities.
 But not necessarily equals in their endowments
and resources.
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If the tax revenues come from other levels of
government, citizens lack incentives to
consider costs and will demand local services
beyond the efficient level
 Marginal costs are higher than marginal benefits
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If citizens must tax themselves for the local
services they receive, they will consume
those services at a more efficient level
 Marginal costs=marginal benefits
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Basic economic theory suggests that under
competitive market conditions, competition
among firms will result in an efficient
allocation of resources.
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Similarly competition among decentralized
local governments can lead to more costeffective local services, innovation in services,
etc.
Tiebout (1956) suggests that the ability of
citizens to choose among local jurisdictions
will result in an efficient allocation of citizens
among jurisdictions based on their
preferences for public goods.
 The governments are implicitly competing
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Series of strong assumptions for competitive
market conditions to exist.
If the assumptions do not hold the market
may not be competitive and therefore may
not produce efficient results.
In addition there are economic outcomes
beyond efficiency that society may want.
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Public finance theory: when the market is not
providing economic outcomes that the
society desires there is a role for government.
1. Maintain competitive market conditions.
2. Ensure efficient provision of goods that the
market does not provide at efficient levels.
3. Equity
4. Economic growth
5. Economic stability
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But it is possible that competition among
local governments may not produce the
results that public finance theory suggests for
the role of government.
The cases I will focus on are equity and interjurisdictional spillovers.
 In these cases competition among local
governments can lead to undesirable outcomes.
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This is an argument for flexible governance
relations between local governments.
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There may be differences in endowments
across jurisdictions, such as natural resources
or past investment in infrastructure.
 I will not focus on this case
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In addition citizens may move between
jurisdictions (Tiebout 1956)
 People’s demand for public services varies by
income.
 As a result jurisdictions may have wide differences
in per capita income
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Tiebout (1956) notes, in the case of equity
expenditures those who are not receiving the
benefits may chose other jurisdictions because
they are paying for public services they do not
receive.
It is also possible that those receiving equity
assistance may migrate to jurisdictions offering
higher levels of assistance.
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To avoid the potential that lower income
individuals may migrate in search of higher
benefits, jurisdictions may cut equity
expenditures; known as a “race to the bottom.”
Bruekner (2000) reviews 8 studies after the US
changed its main income assistance program
for low income families.
Finds evidence that states looked to neighbors
when setting benefit levels to avoid recipients
migrating into the state.
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Recommendation is to place responsibility for
funding equity expenditures at higher levels.
Funding to provide equity between regions
with different resource endowments is also
recommended to be at a higher level of
government.
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T he market does not produce efficient
outcomes if the actor does not receive the full
benefit or pay the full costs of the action.
That is actions by one actor affects others,
positively or negatively:
 External costs
 External benefits
 Public goods
 Common pool resources
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As with market actors, the actions of one
jurisdiction can provide benefits or costs for
other jurisdictions.
These are called inter-jurisdictional spillovers
and are caused by the same factors that lead
to the market not being efficient.
Therefore, the jurisdictions may not allocate
resources efficiently
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The actor does not have to take the full costs
of the action into account and others bear
part of the costs in the form of pollution.
Similarly, jurisdictions may cause costs–
pollution--for other jurisdictions
 by the direct actions of the jurisdiction, or
 due to regulations (or lack of them) on their
citizens or businesses
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Example: US sulfur dioxide emissions drifted
into Canada, causing acid rain, because there
were no US regulations on emissions.
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US rivers that cross state borders are more
polluted at the borders than in the interior of
the state (Sigman, 2002).
 In the interior, the state bears the cost of pollution
so it has an incentive to keep the river clean.
 At its downstream border the pollution falls on
another state.
 At its upstream border the state is receiving
pollution from another state.
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Compared the water quality of interstate
rivers of states in statas that have been given
authority to set water quality guidelines with
those that have not. Sigman (2005).
Those with state authority sent 4% more
pollution downstream than those operating
under federal rules.
States choose to minimize their costs at the
expense of other states.
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These issues lead to adversarial relations.
Governance mechanism are needed that
encourage collaboration
An independent facilitator or mediator that is
perceived as unbiased by all parties may be
needed in cases where jurisdictions do not
collaborate.
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The good is rival: once one person or
jurisdiction has it, it is not available to
another or its value to another is reduced.
Also, it is difficult to exclude people or
jurisdictions from access to the good.
The combination results in competition to get
as much of the good as possible before others
can get it. The competition results in
degradation of the quality or depletion of the
quantity of the good.
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An example of this is the damming of a river
that flows through multiple jurisdictions.
The jurisdiction that builds the dam lessens
the water flow downstream—that is the
quantity of the resource is less
Or the use of a river for irrigation water
lessens the water flow downstream
In the US the Missouri River is an example
There are similar issues on the Mekong River
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Tax bases that are mobile are a common pool
resource. Examples:
 If local governments can charge a sales tax they
may compete with other jurisdictions for
shoppers.
 Local government s may compete for firms to
locate in their jurisdiction for the property taxes,
business license revenues or other local business
fees or taxes.
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Rival: if one jurisdiction gets the shoppers or
the firm (that is the tax base) the other does
not.
Depletion: tax competition to get the tax
base--through lowering tax rate or giving tax
incentives to firms-- may result in lower tax
revenues for the competing jurisdictions.
Called strategic interactions or tax
competition and can take many forms
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In the US, state and local governments spend
$50 Billion in direct incentives to firms (Peters
and Fisher 2004).
Where firms locate has almost no impact on
national economic growth.
Local governments are trying to increase local
economic growth and competing for the
common pool tax bases.
Jurisdictions are competing for local economic
growth; not concerned with national level.
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West Virginia had a sales tax on food, 19791984.
The neighboring five states did not.
Divided counties into those on the state
border where it is easy for shoppers to cross
state lines and counties not on state borders
so it is more difficult for shoppers to cross.
Shoppers did cross state lines and stopped
doing so when the tax was removed. (Walsh
and Jones, 1988)
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In Missouri the state has a sales tax and local
governments—counties and cities—may have
additional sales taxes. The total sales tax
varies by jurisdiction.
In 2004 Missouri held a sales tax holiday—
certain items were exempt from state sales
taxes for 3-days. Said it was to help families
buy school clothing and computers.
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Local governments in Missouri can choose
any combination of property and sales taxes
and set their own rates up to a cap imposed
by the state.
Local governments could choose to opt-0ut—
not lower their local sales tax rate--or opt-in
All local governments had a very short period
in which to decide.
This is a natural experiment to test for tax
competition
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Cities in counties on the state border were
more likely to participate than interior cities.
Cities located in counties that participated in
the holiday were more likely to participate.
Cities in counties with a higher number of cities
were less likely to participate.
 This may be a reflection of the concentration of a
large number of smaller cities around the two
largest cities—St. Louis and Kansas City.
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Cities with higher sales tax rates—that is they
are more dependent on sales taxes for
revenues—were less likely to participate
 Some cities have only a sales tax and no property
tax
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Nearly 78% of the cities participated
Overall there is evidence of tax competition.
In another study we estimated the loss of
revenue by local governments as $8 million
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Strategic interactions: when the competition
between local governments involves
expenditures or regulations.
Can lead to increased regulations—planning—
or expenditures—better local services.
The common pool resource is mobile citizens
that they want to attract or do not want to
attract.
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Case, Rosen and Hines (1993) find that US
states follow their neighbors in spending.
 They may be competing to attract citizens that
want these services.
 Higher spending by neighbors may give the state
some room to increase spending and still be
competitive with neighbors.
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Bruekner (1998): California cities adopted
growth control measures if their neighbors
adopted them.
 May be trying to not attract certain citizens
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Government decentralization can lead to a
more efficient allocation of local public
services because those who receive the
services also pay for them.
Competition among decentralized
governments can lead to lower costs of public
services, innovation, etc.
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In some cases, competition among
decentralized governments can lead to
undesirable outcomes.
Citizens may search for the mix of public
services that they desire. This can lead to
large differences in income among
communities.
To alleviate this sorting, equity expenditures
may be funded by a higher level of
government.
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Because inter-jurisdictional spillovers may be
positive or negative, may be short or long
run, may involve varying numbers of
jurisdictions, flexible governance
mechanisms may be more useful than formal
structures.
 Laws which allow collaborations, such as sharing
of tax bases, contracting between governments,
voting by jurisdictions on joint issues.
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Laws which allow collaborations, such as
 sharing of tax bases,
 voting by jurisdictions on joint issues,
 contracting between governments,
 agreements that are specific to the issue and not a
general collaboration.
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Unbiased facilitators and mediators may be
need when a jurisdiction refuses to
collaborate.
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Third International Conference on Local Government
Khon Kaen University, Thailand. November 15-18, 2012
35