Abstract
Fiscal federalism in the USA has a distinctive structure that contrasts sharply with that in most other industrialized nations. Our purpose in this paper is to describe and explore the US “brand” of fiscal federalism. We demonstrate that there is a striking amount of variety in the 50 state fiscal systems and that these differences have prevailed in the face of potentially disruptive forces. The variety we find stems in large part from states having meaningful fiscal autonomy, in particular, the authority to levy taxes. The result is likely higher societal welfare than would ensue without this autonomy.
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Source: Government Finance Statistics, International Monetary Fund, eLibrary Data, updated February 4, 2016. We do not include France, Denmark, Mexico, and Norway because data on state and local grants are not reported for these countries
Source: United States Census, 2011
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Notes
The gap between the degrees of decentralization of expenditures and revenues is even smaller for New Zealand; however, the degree of decentralization is so small in New Zealand that the gap has very little importance.
In an earlier literature, Brennan and Buchanan (1980) argue that there is a causal relation between the extent of fiscal decentralization and the overall size of the public budget. They contend that competition among lower-level governments constrains the monopolistic tendencies of the public sector so that countries with highly decentralized public sectors would tend to have relatively small public sectors. This notion became known as the Leviathan hypothesis. The evidence is, however, mixed at best. Oates (1985), in the first empirical study of “Leviathan,” finds that the evidence runs counter to the Brennan–Buchanan proposition. Some later empirical work, however, suggests a more complex relationship. See, for example, Ashworth et al. (2013).
Canada is unusual in that it has both large equalizing grants and extensive subnational revenue authority. See Simeon et al. (2014).
Germany’s number is not comparable to the others because of the unique German system in which equalizing transfers occur as redistributions between states rather than grants from the central government; since Fig. 1 does not capture redistributions between states, the number for Germany does not capture the total amount of transfer revenues. See Enderlein and von Müller (2014) for a description of the differences between Germany’s form of fiscal federalism compared to others. New Zealand’s figure is very similar to the US figure, but note from Table 2 that its degree of decentralization in revenues is only 7%.
Our measure of diversity is the coefficient of variation, i.e., the standard deviation divided by the mean.
For an examination of changes in the distribution of K-12 education spending across school districts within and across states from 1972 to 1992, see Murray et al. (1998).
In early 2015, the education committee of the Nebraska legislature voted to kill a bill that would have allowed charter schools in Omaha.
Hawaii is an outlier state in many respects, not the least of which is the fact that it has only one school district.
Our description of the systems in Michigan and Ohio relies on Conlin and Thompson (2014).
Michigan school districts are constrained in terms of raising revenues for operating expenditures; however, residents can vote to raise local property taxes for capital expenditures (Conlin and Thompson 2014).
Medicaid expenditures as a share of public welfare expenditures increased from 45% in 1982 to 80% in 2012.
Rhode and Strumpf (2003), using observations on municipalities and counties in the USA from 1850 to 1990, test for evidence of Tiebout sorting by examining trends in diversity in fiscal policy. Contrary to predictions of the Tiebout model, they find that in the long run as transportation costs have fallen communities have become more alike in their fiscal policies. One possible explanation for why their results differ from ours is that we employ quite different units of analysis and analyze quite different time periods.
See Calsamiglia et al. (2013) for a treatment of the notion that minimal levels of spending can be achieved without losing subnational fiscal autonomy.
The Every Student Succeeds Act, signed into law in December 2015, prohibited the federal government from imposing academic standards, including the Common Core.
The Affordable Care Act illustrates the ongoing debate in the USA over the appropriate role of the central government in a fiscal federal system. Many would have preferred a federal requirement that all states expand Medicaid, but others found such a requirement overly intrusive and, in the end, states were given the choice, with 19 choosing not to expand Medicaid despite the federal government agreeing to cover virtually the entire cost of the expansion.
Recall from Table 3, the relatively low amount of diversity across regions in the three European countries analyzed.
This possibility is illustrated by Canada, where large equalizing grants exist next to extensive fiscal autonomy for the provinces.
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Acknowledgements
We would like to thank Michael Fogarty, Zach Herron, Ian Hodgson, Elena Jarocinska, and Katie Strair for superb research assistance. We also would like to thank Robin Boadway, David Heald, Jim Hines, Bob Schwab, Mehmet Tosun, and John Wallis for very insightful comments, Mike Conlin for providing data and guidance, and two anonymous referees for helpful suggestions. Teresa Garcia-Milà acknowledges support from CREI and from Spanish Ministerio de Ciencia e Innovación, ECO2011-25272, ECO2014-55555-P, and Severo Ochoa Program for Centers of Excellence in R&D (SEV-2015-0563).
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We dedicate this paper to the memory of our dear friend, mentor and coauthor, Wally Oates, who passed away before we could complete the paper. Wally’s contributions to the paper—and to our understanding of fiscal federalism in general—were immense.
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Garcia-Milà, T., McGuire, T.J. & Oates, W.E. Strength in diversity? Fiscal federalism among the fifty US states. Int Tax Public Finance 25, 1071–1091 (2018). https://doi.org/10.1007/s10797-018-9485-4
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DOI: https://doi.org/10.1007/s10797-018-9485-4