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Public investment and budget rules for state vs. local governments

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  • Marco Bassetto

Abstract

Across different layers of the U.S. government there are surprisingly large differences in institutional provisions that impose fiscal discipline, such as constitutionally mandated deficit or debt limits, or specific tax bases. In this paper we develop a framework that can be used to quantitatively assess their costs and benefits. The model features both endogenous and exogenous mobility across jurisdictions, so we can evaluate whether the different degree of mobility at the local vs. national level can justify different institutional restrictions. In preliminary results, we show that pure land taxes have very beneficial incentive effects, but can only raise limited amounts of revenues. In contrast, under exogenous mobility, income taxes lead unambiguously to insufficient incentives to invest in public capital, unless the fiscal constraints explicitly favor such investment. This conclusion seems to hold even with the introduction of endogenous mobility, since adverse congestion effects from inefficient migration offset the beneficial impact of (partial) capitalization of future taxes into land prices.

Suggested Citation

  • Marco Bassetto, 2008. "Public investment and budget rules for state vs. local governments," Working Paper Series WP-08-21, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-08-21
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    References listed on IDEAS

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    Cited by:

    1. Marco Bassetto, 2009. "The Research Agenda: Marco Bassetto on the Quantitative Evaluation of Fiscal Policy Rules," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 10(2), April.
    2. Marco Bassetto & Leslie McGranahan, 2009. "On the relationship between mobility, population growth, and capital spending in the United States," Working Paper Series WP-09-25, Federal Reserve Bank of Chicago.

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    Keywords

    State finance ; Local finance ; Investments;

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