Caught at the Bottom? Redistribution and Local Government in an Era of Devolution

• DOI: 10.1177/0160323X15570758
• Date: 01 March 2015
• Author: Michael Craw
• Published date: 01 March 2015
• Subject Matter: Reviews & Essays

Reviews & Essays
State and Local Government Review
2015, Vol. 47(1) 68-77
Caught at the Bottom?
ª The Author(s) 2015
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Redistribution and Local
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DOI: 10.1177/0160323X15570758
Government in an Era
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of Devolution
Michael Craw1
Abstract
Conventional wisdom in public finance holds that local governments should avoid committing
resources to social welfare programs. Yet many local governments have assumed significant
responsibilities in this area. This article reexamines theories of fiscal federalism based on the
experiences of local government with redistributive policy. Theories of fiscal federalism make
assumptions about the mobility of capital and labor, the range of choices in a metropolitan region, and
the extent of fiscal-independence-afforded local governments. Empirical variation in these conditions,
however, results in differing outcomes from local redistribution across place and over time.
Keywords
Tiebout, redistribution, second-order devolution
Public finance specialists from the entire political
higher-income households; Buchanan 1971;
spectrum share the viewpoint that local govern-
Oates 1972; Peterson 1981). The implication
ment is not the appropriate level of government
is that national and not local governments
to redistribute income or to finance poverty
should take the lead in redistributive policy
alleviation.
(Oates 1972).
Milwaukee city budget director Mark Nicolini
Even so, local governments play significant
in 2006, speaking against city funding for an
roles in financing and implementing social wel-
affordable housing trust fund (Milwaukee Journal
fare policy (Craw 2010; Gillette 2011). In 2007,
Sentinel, September 23, 2006)
local governments made direct expenditures of
$48.2 billion in public welfare, $107.7 billion
Mr. Nicolini’s comment reveals a common bit
in health care and hospitals, and $37.2 billion
of conventional wisdom in public finance: that
local governments should avoid committing
their own resources to social welfare programs
1 Institute of Government, University of Arkansas at Little
and policies. This conclusion emerges as an
Rock, Little Rock, AR, USA
implication of American fiscal federalism:
local governments raise most of their own rev-
Corresponding Author:
Michael Craw, Institute of Government, University of
enues and so they should avoid policies that
Arkansas at Little Rock, 2801 South University Avenue,
increase costs but provide few benefits for
Little Rock, AR 72204, USA.
those bearing more of the tax burden (i.e.,
Email: mccraw@ualr.edu

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Craw
69
in housing and community development. Local
governments will underprovide it comes from
spending in these three functions from own-
three characteristics of American federalism:
source revenues amounted to $102.4 billion.1
(1) ease of movement across jurisdictions; (2)
Local governments have also pioneered such
meaningful choice in taxes, services, and other
redistributive policy innovations as minimum
policies across jurisdictions; and (3) local fiscal
wage ordinances (Gillette 2011; I.Martin
independence (i.e., local reliance on own-
2001), inclusionary zoning, and affordable
source revenues). Taken together, these condi-
housing linkage policies (Goetz 1993).
tions imply that local governments provide
Moreover, in recent years, federal and state
public goods in a market-like environment and
governments have increasingly shifted more
thus respond better to citizen preferences than
responsibility for social welfare policy to local
national or state governments. But these condi-
governments. For instance, federal urban policy
tions also generate incentives for local govern-
since the 1970s has given local governments
ments to avoid redistributive policies.
much greater responsibility in affordable hous-
Tiebout (1956) described the demand side
ing policy (Conlan 1998; Judd and Swanstrom
for this market. Given mobility and choice,
2010). And since implementation of federal
households and business owners have incen-
welfare reform in 1997, twenty states increased
tives to locate in communities that best match
local responsibility and autonomy for public
their preferences for services and taxes. Consis-
welfare policy (Gainsborough 2003).
tent with this, Teske et al. (1993) and Bickers
These circumstances motivate us to revisit a
and Stein (1998) find that households in the
central question in fiscal federalism: how does
process of moving make decisions on where
the division of social welfare policy across lev-
to locate based in part on local policy outputs
els of government affect the fiscal health of
and outcomes.2 Thus, local provision of public
local governments and the fairness of policy
goods has the potential to result in greater
outcomes (Oates 1972)? This article reviews
welfare for a given set of resources than a
some of the research on this question. It turns
‘‘one-size-fits-all’’ set of policies and taxes
out that recommendations against local commit-
developed by federal or state governments.
ments to social welfare functions rest on two key
The supply side to the local public goods
assumptions: (i) that households and businesses
market, however, suggests that local public
can move costlessly to new jurisdictions and (ii)
officials have incentives to respond much more
that local governments raise most or all revenues
readily to the policy preferences of high-
from local taxes and fees. But at the same time,
income households and businesses than to
research finds that jurisdictions differ greatly in
those of lower-income households. When local
the extent to which these assumptions hold.
governments are fiscally independent, Bucha-
Hence, the effects of local social welfare policy
nan (1971) demonstrates that high-income
vary across place and over time. The implication
households will tend to pay more in local taxes
is that some, but not all, local governments may
than they will cost in additional services and
be ‘‘caught at the bottom’’ of a social welfare
thus subsidize services to lower-income house-
regime with fewer federal and state resources
holds.3 As a result, under fiscal independence
to address poverty and with disincentives in
local governments that succeed in attracting
using own-source resources to do so.
more high-income households and businesses
to their communities are in a position to lower
tax rates, increase services, or both.
Mobility, Choice, and Fiscal
Peterson (1981) reaches similar conclusions,
Independence in American
demonstrating that local governments have rea-
sons to favor provision of developmental ser-
Federalism
vices (e.g., roads and other infrastructure), for
The conclusion that regimes assigning signifi-
which the benefits to business and higher
cant responsibility for social welfare to local
income households exceed the taxes they pay,

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70
State and Local Government Review 47(1)
over social welfare services. These predictions
fiscally independent of federal and state gov-
are consistent with observations of local expen-
ernments. Since at least the late 1970s, state
ditures (Schneider 1989; Stein 1990) and local
intergovernmental revenues have consistently
policy agendas (Molotch 1976; Stone 1989).
accounted for about one-third of local govern-
Given these incentives, we can expect policy
ment general revenues and federal intergovern-
that is less supportive of redistribution and that
mental revenues for another 3 to 10 percent.
produces more unequal outcomes when local
Consequently, local governments under Amer-
governments are assigned greater responsibility
ican federalism are to a large extent shielded
for social welfare. For example, under pre–
from the consequences of changes in their
New Deal American social welfare policy,
respective tax bases. This may reduce the
local governments went to great lengths to
effects of interjurisdictional competition and
minimize their responsibilities in caring for the
hence the fiscal incentives to favor the policy
poor, particularly those poor who are not native
preferences of higher-income households and
to the community. Colonial and antebellum-era
businesses (Brunori 2007; Holcombe 1998).
social welfare policy imposed strict controls on
Though intergovernmental revenues may
the migration of the poor (Stark 1995). Even for
loosen the constraints generated by interjuris-
native residents, obtaining relief often entailed
dictional competition, they also reshape the
scrutiny in every aspect of one’s life to assure
incentives facing local governments to conform
that one was making adequate...