State and Local Government Finance: Why It Matters

Abstract

Abstract This article lays out the economists' view of why state and local government matters. To establish the economic framework, the article systematically works through the seminal contributions of Paul Samuelson's theoretical arguments of the importance of a public-sector role for efficiency in resource allocation; Charles Tiebout's thinking on the difference between national and local public goods; Richard Musgrave's classification of the fiscal “branches” of a decentralized federalist system; and Wallace Oates's Decentralization Theorem. It is from this platform that the article proceeds to address three fundamental fiscal policy issues for a multigovernmental society (e.g., US fiscal federalism): the sorting out of expenditure responsibilities among different types of governments (“expenditure assignment”); the question of which type of government should use which type of revenue (“revenue assignment”), and what happens when, for many state and local governments, the costs of the allocation of expenditure responsibilities are greater than that which can be financed from their “own” state/local revenues (the role of “intergovernmental transfers”).