Fiscal Federalism & Public Choice

Fiscal Federalism

Fiscal Federalism is the break down of funding between thethree levels of governments: Federal, State, and Local. The level of fundsgoing between the levels varies from state to state. As we learned in class,most of Federal Revenue comes from individual income taxes; most of the State’srevenue comes from sales taxes(although there are exceptions); most of Localgovernment’s revenue comes from property taxes.

On the expenditure side of the budget, the responsibilitiesagain are broken down between the three major levels of government: Federal,State, and Local. Areas of spending have been created based on three theories:the benefits principle, devolution principle, and the administrationefficiency. These theories put the Federal government in charge of nationaldefense and schools; the state in charge of many social services andtransportation (these are the agency profiles and their budgets provided by the Office of Management and Budget); and cities in charge of policing and economicdevelopment.

The amount of money each state receives varies a lot. Thereare numerous factors going into the calculation of the amount of funds eachstate receives and for what purpose. This Link shows the amount of money per capita thateach state receives from the federal government and if you click on the map ofthe United States and ‘interact’ with the graph the statistics broken downfurther.

There are strong relationships between the Federal budgetand the State budget, and the State budget and Local budgets, and Federalbudget and Local budgets. A decrease in one of the funding sources often leads toincreased burdens in another area. For instance, recent years have necessitated cuts in local government aid from the State to Local governments, a controversial issue during last years budget talks in Minnesota. This couldlead to gaps in local government budgets, which would have to filled with othersources of money closer to local governments, property taxes.

Public Choice

Public choice is where economics and political science mergeinto one realm of study. This discipline watches over two distinct types ofvoting. The first in through the actual process of casting a vote on candidatesor fiscal issues like school levies or tax increases.

The other type of voting being observed is “voting with yourfeet.” This is the idea that if a person does not like their service and taxpackage, they can move out of that school district, city, county, or state.This reminded me of the topic of “Tax Flight.” The presupposition behind tax flight is that a state would end uplosing, rather than gaining revenue because people would leave a state because of the tax increase. There was a study by the Center on Budget Policy and Prioritiesthat found the idea that if astate raised taxes it would would cause a significant amount of people to leavean area is a myth.