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INTERGOVERNMENTAL FISCAL RELATIONS

Correspondence

Tax Systems

Grants

State and School Aid

Mandates

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Basic Principle of Fiscal Federalism

• Geographic Matching -- decision unit coincides with beneficiaries from service provision (who also bear the burden of service provision)

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Tax Systems• Federal = Income & Payroll

Taxes• State = Sales Taxes• Local = Property Taxes &

User Fees

Correspondence principle

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Objectives of this bloc of instruction• Understand justifications for

intergovernmental aid• Recognize types of

intergovernmental aid• Appreciate some of the

drawbacks associated with intergovernmental aid

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Justifications

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Violations of correspondence principle

• Economies of Scale and Scope?• Local knowledge (better or worse)• Fiscal Disparity (ability to pay)

• Overlapping jurisdictions• Tax limits (statutory and competitive)

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Types of grants

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Grants• Revenue Sharing• Block Grants• Categorical Grants

• Formula (need contingent -- directly addressed to fiscal disparities)

• Project (deserving -- need plus political considerations)

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State School Aid• Flat Grants, General, and Categorical• Foundation Grants

SC = F(ADA) - c(PTB) ≥ 0LC = r(PTB)

TC = F(ADA) + (r-c)(PTB), orSC + LC

Where: SC = State Aid > 0, LC = Local ContributionF = Foundation Amount Per Pupil

ADA = Pupils in Average Daily Attendancec = Computational Tax Rate, r = Actual Tax Rate

PTB = Property Tax Base

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State School Aid• Flat Grants, General, and Categorical• Foundation Grants

SC = $1000(100) - 1.5%($5M),$25K = $100K - $75K

LC = $150K = 3%($5M)TC = $175K = $100K + $75K, or

$25K+$150K

Where: SC =, LC = Local ContributionF = $1000

ADA = 100c = 1.5%, r = 1%

PTB = $5M

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State School Aid• Flat Grants, General, and Categorical• Foundation Grants

SC = $1000(100) - 1.5%($5M),$25K = $100K - $75K

LC = $50K = 1%($5M)TC = $75K = $100K - $25K, or

$25K+$50K

Where: SC =, LC = Local ContributionF = $1000

ADA = 100c = 1.5%, r = 1%

PTB = $5M

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State School Aid• Guaranteed Tax Base Grants

(Percentage or Power Equalizing)

SC = r(STB*ADA) - r(PTB)LC = r(PTB)TC = r(STB)

STB = ADA(stb)

Where: SC = State Aid > 0, LC = Local ContributionR = Locally set property tx rate

stb = Standard Tax Base Per Per PupilADA = Pupils in Average Daily Attendance

PTB = District Property Tax BaseSTB = Statewide Property Tax Base

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State School Aid• Guaranteed Tax Base Grants

(Percentage or Power Equalizing)

SC = 1%($100K*100) - 1%($5M) ≥ 0,$50K = $100K - $50K

LC = $50KTC = $100K = 1%($100K*100), or

$50K + $50K

Where: r = 3%stb = $100KADA = 100PTB = $5M

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State School Aid• Guaranteed Tax Base Grants

(Percentage or Power Equalizing)

SC = 3%($100K*100) - 3%($5M) ≥ 0,$150K = $300K - $150K

LC = $150KTC = $300K = 3%(100K*100), or

$150K + $150K

Where: r = 3%stb = $100KADA = 100PTB = $5M

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State School Aid• Guaranteed Tax Base Grants

(Percentage or Power Equalizing)

SC = 3%($100K*100) - 3%($15M) ≥ 0,-$150K = $300K - $450K

LC = $450KTC = $300K = 3%(100K*100), or

-$150K + $550K

Where: r = 3%stb = $100KADA = 100

PTB = $15M

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State School Aid• Guaranteed Per-pupil Revenue Grants

(Support Per Student Equalizing)

SC = Ai(ADA) - t(PTB), LC = t(PTB)

TC = Ai(sumADAi) - (t-r)(PTB)

Where: SC = State Aid > 0, LC = Local ContributionAi = Grant amount for student type I

t = maximum allowable district tax rateADA = Pupils in Average Daily Attendance

PTB = Local Property Tax Base

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State School Aid• Guaranteed Per-pupil Revenue Grants

(Support Per Student Equalizing)

SC = $1500(100) - 1.5%($5m), $150K - $75K = $75K

LC = $75KTC = $150K, or $75K + $75K

Where:Ai = $1500t = 1.5%

ADA = 100PTB = $5m

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State School Aid• Guaranteed Per-pupil Revenue Grants

(Support Per Student Equalizing)

SC = $1500(100) - 1.5%($15m), $150K - $225K = -$75K

LC = $225KTC = $150K, or -$75K + $225K

Where:Ai = $1500t = 1.5%

ADA = 100PTB = $15m

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Drawbacks

He who pays the piper calls the tune

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Mandates• Internalizing Externalities• Nationwide/Statewide

uniformity in service delivery• Tax shifting

Un-funded Mandates Reform Act of 1995