Discussion on State and Local Finance

Answer 10 of 17 questions.
No need to overcomplicate, each question requires a few sentences that get the point across, one paragraph each should suffice. Choose any 10 you are most comfortable with.

ECO 356 State and Local Finance

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Fall 2020









































Class Time___________________________________


Summary: This past year has been an extraordinary one for so many reasons.  We are living through a historic period which has impacted each of us in several ways, both personally and academically. Every semester when I start this class, my goal is to teach each of you, my students, how the theory that is presented in the textbook operates in the real world of fiscal policy.  My hope is that you will have a better understanding of how and why you should stay informed, and most importantly engaged in the process that involves how your Federal, state and local government spend your money each day. Understanding the context of how these decisions are made helps you become better informed taxpayers.


The recent events and how the Federal, states and localities will respond should be based on some historical context as well as many of the theories we have been discussing throughout the semester.  As a result, this final exam is intended for you to show me that you have gained the knowledge necessary to analyze what governments at all levels have done so far, and what they should focus on in the upcoming fiscal years.


Instructions:  You should answer 10 of the 17 following questions, each will be worth 10 points.  You may use your notes, slides, and any additional sources you find.  I will be looking for you to demonstrate that you understand these issues, the fundamentals or policy behind each, how they will shape what we can anticipate from policy makers, and/or what you believe should be done.   The links included in the questions are intended to be a guide.  Feel free to find other sources to support your answer.  Include sources as a link, formal citation is not necessary for your additional sources (i.e. links are sufficient)



(1)  TAX = EXP.  From day one of this class, we discussed how the study of State and Local finance is inherently different from the issues addressed by Federal Government in their respective budgets.    The article below is a great example of the fiscal choices that State/Local governments make.  How States and localities will manage through this crisis is dependent upon their prior fiscal choices.  What are the differences between what the Federal government can do, and what the states and localities can do?  What are the implications? You should discuss why these differences matter.  Your answer should include specific examples.


(2) Richard Musgrave’s 3-part definition of the “role” of government provides us with the rationalization for many of the policies enacted by Federal, State, and Local governments.  Please describe each and provide an example of how a government program (or policy) enacted to date to address the COVID crisis help accomplish each of the three roles.   You should have a recent example for each role.




(3)  The United States recently participated in the democratic tradition that stretches back to the founding of the republic: the once-a-decade census of its population.  From 1790 (U.S. population: 3.9 million) to 2010 (U.S. population: 309 million), the decennial census has changed alongside the nation itself. From the territory it covers, to the questions it asks, to how it collects the information, the census has reflected evolution in technology, the role of the federal government, and the size of the country itself.    The stakes are high for States, local governments, and regions across the country, which depend on a full and accurate count of their populations to ensure their fiscal health and political strength.   How has the current crisis impact this vital account of the US population?  What are areas of fiscal health that the States and local governments should be concerned about?   What will be some of the challenges?


(4) As we discussed in class, grants from the Federal government are generally provided through three different types.  Please describe the four elements that support grant policy and the three types of grants that the Federal government utilizes.  The article below discusses some of the outstanding issues relating to the need for additional funds from the Federal governments for the states and localities.  Based on your knowledge of why grants exist, and how they are calculated, how would you alter some of the formulas being used to distribute aid?  What recommendations should policy makers consider ensuring that the States that have been hardest hit by the crisis are compensated?  Alternatively, if you believe it is not up to the Federal government to support these states with additional relief, defend your position and offer alternatives for revenues that the State should consider.


(5)  Fiscal choices determine the mix of revenues that a State relies on to fund their budget on an annual basis.  The following article discusses the current estimate of the shortfalls that States are anticipating.  Describe the primary sources of revenues that the States rely on, noting if they are progressive, regressive or proportional (explaining each).  How has each source been impacted by the current crisis, and what should policy makers do to address the shortfall in receipts that is likely to occur in the upcoming fiscal years?


(6) When looking at the amount and proportion of state/local dollars that are spent annually on education, it is easy to see why there is a concern regarding the question of declining performance – that is, why, despite the investment by States/localities, scores for exams such as the SAT’s have remained constant over the last several years.  Describe the relationship between inputs and outputs or outcomes in the production of education.  What are at least two things that you believe are measured currently in your local district.  In thinking about the impact of the corona virus on lower education across the country, how do you think these validation measures could/should change.   Your answer should address some of the inherent challenges many districts have been facing as they have moved to on-line platforms.



(7)  New York State recently enacted its State fiscal year budget for 2020-21.  It was based on several assumptions and included several provisions relating to borrowing by the State to provide a source of funds for in the upcoming fiscal year.  The article below describes most of the debt related provisions included in the budget.  What are the three primary reasons that State and local governments borrow?  What are the two types of debt which is utilized?  What is the difference in growth rate between the two?  Using the article below give me an example of each type of debt, and what reason they support.  Do you agree with further increasing our debt burden?  Support your position.   Alternatively, if you do not agree with these choices, defend your position, and offer alternatives for revenues that the State should consider.



(8) Please provide an overview of the role of the Federal Government in Transportation Financing (as it relates to State & Local Governments).    What funding streams are used to finance these projects?  What is the basis for the difference in level of funding between transportation modes (highways, mass transit, rail, air & water)?  Identify the rationale behind the Federal government’s level of involvement historically. What are the current transportation issues facing New Yorkers (specifically those downstate in the NYC metropolitan region)? How will the current economic crisis affect these revenues? What additional issues do you foresee in the future?









(9) Economic Development is a significant programmatic area in the States, as they (i.e. the States) compete against each other to attract new businesses and the accompanying jobs in a specific state.  In addition to comparison of tax rates, there are essentially two types of incentives offered by the states – please define and explain the primary differences between the two approaches.  Your answer should include two examples of each.  Which approach do you believe is most effective why?  In light of the current crisis, what would you change or recommend as an alternative economic development program?




(10)  A year ago, former President Obama gave a speech in which he alluded to an economic theory we discussed in class this semester.  The press piece follows.  What theory was he referring to, and how does it relate to the other theory we also covered?  How do they impact how policy makers determine fiscal choices and level of public goods?  What is the third element?   Please discuss how these three works together in determining a jurisdictions policy priority as reflected in their respective budgets.  This is a presidential election year, and you had the opportunity to vote for members of the New York State legislature.  Based on their respective handling of the current crisis, how did your individual demand impact what your choice in candidates?   How do the election results reflect this theory (if they do not, or are uncertain, note the outstanding issues)


Obama warns Democrats against going too far left: ‘We have to be rooted in reality’



  • Former President Barack Obama on Friday warned Democratic primary candidates to avoid moving too far left in their policy proposals. 
  • “Even as we push the envelope and we are bold in our vision we also have to be rooted in reality,” Obama said. “The average American doesn’t think we have to completely tear down the system and remake it.”
  • Obama’s comments, made to the Democracy Alliance in Washington D.C., come as a large spread of candidates compete in the Democratic primary.
  • The former president has mostly stayed quiet about the election and has told allies that he and his wife have no plans to endorse anyone because they don’t want to influence the election.  

Former President Barack Obama on Friday warned Democratic primary candidates to avoid leaning too far left in their campaigns and raised concerns that certain liberal policy proposals on health care and immigration might have gone further than public opinion.

In an unusual address to a room of wealthy Democratic donors, Obama urged Democratic candidates to be pragmatic in their messages to voters. While he didn’t mention any specific presidential primary candidate or proposal, Obama warned that the average American voter does not align with views from “certain left-leaning Twitter feeds or the activist wing of our party.”

Obama said that his concerns aren’t a criticism of party activists, whose job he said is to “poke and prod and text and inspire and motivate.” But he emphasized that whoever the candidate is, their ultimate job is to get elected.

“Even as we push the envelope and we are bold in our vision we also have to be rooted in reality,” Obama said. “The average American doesn’t think we have to completely tear down the system and remake it.”

Obama’s comments, made to the Democracy Alliance in Washington D.C., come as a large spread of candidates compete in the Democratic primary. The former president has mostly stayed quiet about the election and has told allies that he and his wife have no plans to endorse anyone because they don’t want to influence the election.

His statements could be seen as a nudge to Senators Bernie Sanders and Elizabeth Warren, who have championed large, progressive policies aimed to significantly change the structure of the country.

“I don’t think we should be deluded into thinking that the resistance to certain approaches to things is simply because voters haven’t heard a bold enough proposal and if they hear something as bold as possible then immediately that’s going to activate them,” he said.

Obama said candidates should “push past” his achievements as president but embrace a message that will keep them competitive across all parts of the country.

“For those who get stressed about robust primaries, I just have to remind you I had a very robust primary,” he told the donors. “I’m confident that at the end of the process we will have a candidate that has been tested.


(11)   In 2017, tax reform took center stage at the Federal Level, with Congress debating the provisions that should be enacted to “reform” the tax law for the first time since 1986.  Following the 1986  Federal change, in 1987 many states enacted additional tax reforms to benefit their individuals and corporations at the State level.   Based on your understanding the issues relating to the States tax law, if you were to recommend tax policy changes in New York to offset the costs of the current crisis, what would they be? Identify two tax policy recommendations for consideration in the upcoming budget which will be introduced next year.   Explain the tax you are proposing to change, what the issues are, and how your recommendations would represent the four elements of good tax policy.






(12)   After reading the below article and knowing what you do about the increase in the States of gaming revenues generally, please provide a brief history of this monopoly revenue source.  Your answer should discuss why policy makers validate the high effective tax rate, why they continue to rely on and potentially expand the types of gaming.   While the revenue it generates cannot be disputed, what are some of the issues associated with increasing our reliance on these funds?  Should this regressive source of revenue be used to offset the costs associated with the current crisis?  Support your position.   While the article below is dated, it is still a current issue.  Does your answer change in light of the need for revenue as a result of the COVID-19 recession?


New York lawmakers mull sports betting on mobile devices by David Klepper, Associated Press


Updated 1:52 pm PDT, Wednesday, May 8, 2019

ALBANY, N.Y. (AP) — New York will lose out on hundreds of millions of dollars or more if it doesn’t authorize sports gambling on smartphones and other mobile devices, gambling supporters and analysts told state lawmakers at a hearing Wednesday.

Lawmakers at the hearing said they are eager to capture that revenue — which is currently going to illegal wagers or to states like New Jersey that have already approved sports gambling. They’ve introduced bills to authorize wagers on mobile devices and, eventually, in person at sports venues.  ECOMMENDED VIDEO

There’s one wrinkle: Democratic Gov. Andrew Cuomo argues such a move requires changing the state Constitution, a multi-year process that requires voter approval.  A U.S. Supreme Court ruling last year opened the door to sports betting outside Nevada. Since then, several states have legalized it and dozens are considering similar moves. In New York, sports wagers will begin at the state’s four non-Native American-owned casinos once regulations are finalized. With lawmakers expected to conclude their annual session late next month, supporters of expanded sports betting are hoping there’s still time to pass legislation — even if it could face a veto by Cuomo.

“We can sit and watch it go by or we can do something about it,” said Sen. Joseph Addabbo, D-Queens, the chairman of the Senate’s Committee on Racing, Gaming and Wagering.

Attorney Daniel Wallach, an expert on laws on sports betting, testified Wednesday that a constitutional amendment is not needed. He noted that the state has tweaked its gambling laws before — adding remote horse betting, for instance — without changing the constitution.  “It’s up to state lawmakers,” he said. Other experts told lawmakers that New York stands to lose up to $1 billion a year if it doesn’t follow New Jersey’s lead in permitting sports bets. Others testifying Wednesday included a representative from the NBA, who said professional sports leagues deserve to get a cut of the revenue from wagers.  Cuomo, so far, hasn’t changed his mind.  “We have constitutional concerns on this issue that we have raised for nearly a year,” said spokesman Jason Conwall. “Our position remains the same.”


(13)   Local Autonomy v. level of taxation.  We talked about this with Lindahl pricing (i.e. What’s your benefit) and how you, as an individual, validate what you pay in taxes to your local jurisdiction.  This validation can be used as the rationale for why we have so many different levels of government.  The article below discusses a community decision which recently happened in Ohio.    Describe the theory of Lindahl,  other choices that may have been available to the community and discuss what issues other local governments likely face in making a similar decision considering the current crisis.  How will the current property tax cap in New York impact a jurisdictions decision on spending considering potential reductions in services?


A village of 5,000 people outside of Cincinnati revolted against a 1 percent income tax, voting instead to dissolve the town, Sarah Mervosh, NY Times Nov. 26, 2019

AMELIA, Ohio — There were allegations of suspicious political donations and rumors about fake social media accounts. Protesters wore T-shirts that said, “Stop the tyranny!” At one point, a former official was escorted out of a public meeting in handcuffs. For more than a year, the residents of Amelia, just outside Cincinnati, have been consumed by a fiery debate over a proposal to impose a new local tax of just 1 percent. This month, voters found a way around the problem — by getting rid of their 119-year-old village altogether.

In some ways, the dramatic move, which takes effect this week, reflects the frugal, small-government mind-set that permeates Amelia, a conservative community of 5,000 people where the median household income is $61,500. Many residents are reluctant to hand over any more of their paychecks to the government, even the one that picks up their leaves in the fall and plows snow from their streets through the winter.But at a time when Americans’ trust in government is at historic lows, the fight in Amelia also shows what can happen when polarized voters decide that their government is so broken that it simply shouldn’t exist.

 “This all got way out of hand,” said Todd Hart, the one-time mayor of Amelia, who lost his bid for re-election on the same night the village disbanded. While there might be an argument that eliminating a layer of government could result in greater efficiency, the decision in Amelia represents a shift, said William Howell, a political-science professor at the University of Chicago.

“That you would have this kind of violent reaction against the introduction of a 1 percent tax suggests a deep-seated aversion to government generally,” he said.

On Amelia’s Main Street, cars will still cruise down the 1.5-mile road lined with a hair salon, a tattoo parlor, a yoga studio and a bustling Dollar Tree. But the “Welcome to Amelia” sign has already been taken down. As of this week, the village’s seven police officers and a handful of other employees are out of a job. And the village, established in 1900, is being split in half: Residents who live on one side of Main Street will belong to one township, and their neighbors across the street to another. 

Wearing a sweater with Amelia’s logo on it, Mayor Hart, 60, drove through town after the election, pointing out the ranch-style house near the library where he has lived for half his life and the park where city officials gave away pumpkins at Halloween.

“If you don’t like what your government is doing, just vote them out,” he said in an interview. “That’s democracy. That’s why we live in America.”  But he added: “Don’t destroy your town.” 

 ‘What am I getting for my money?  The drama started last year when the village council decided to impose a 1 percent income tax on all residents and workers, without public input. Many in the village found out about the change from a letter sent in the mail only after the decision was made.  

Most Americans pay no local income taxes, but the practice is common in parts of the East Coast and Midwest, particularly Ohio, where more than 600 municipalities have an income tax to help pay for local services.

While Ohio’s tax burden is moderate overall, experts say the local taxes are comparatively high. According to a calculation by the Tax Foundation in Washington, a conservative think tank, the average couple in Amelia was already paying about $1,400 in state income tax, $780 in state sales tax, $130 in local sales tax and $3,300 in property taxes. The new, 1 percent income tax worked out to about $615 extra a year.

“You have these different layers of taxation, and it is not always clear to individuals what they are getting for each layer they are paying,” said Greg R. Lawson, a research fellow at the Buckeye Institute, a free-market think tank in Columbus.  The mayor said the village had waited as long as it could but needed the money to help pay for roads and other expenses.

Faced with the prospect of digging into their pockets, residents in Amelia began to question the village council’s spending, including hundreds of thousands of dollars to upgrade village offices to a Victorian-style building, with a lion door-knocker, chandeliers on the ceiling and a gazebo in the backyard. (Mayor Hart said that officials had been cramped in their old offices and that buying the historic building was cheaper than new construction.)

“I would think every American would say, ‘What am I getting?’” said Renee Gerber, a former council member who was arrested while protesting during a meeting last year. “What am I getting for my money?”

Ms. Gerber, 57, soon launched a campaign for mayor. “We don’t want our hard-working dollars to be misspent,” she said.

But for many, the debate became not just a question of who should be running the village, but whether the village should even exist. Like other small communities across Ohio, Amelia is within a township, within a county.

 “That’s just too many layers of fat,” said Ed McCoy, 53, a salesman who drove around town with an “ax the tax” sign plastered prominently on his sedan and led a group in favor of dissolving the village.

“The best way to get rid of that fat,” he said, “is to start at the bottom.”

At least 130 municipalities across the country dissolved between 2000 and 2011, with an uptick after the start of the Great Recession of 2008, according to Michelle Wilde Anderson, a Stanford Law School professor who studied the trend. Since 2012, others dissolved or are in the process of doing so, including at least 12 in Ohio alone, according to the state auditor’s office.

“It’s a very dramatic remedy,” said Ms. Anderson, who found that local governments primarily disband for financial reasons, often because shrinking populations or reduced state funding make paying for basic services unsustainable. 

But Amelia was financially stable, with a population that had nearly doubled since 2000. In recent years, a Kroger supermarket opened on Main Street. New subdivisions sprouted up, advertising tidy suburban homes for starting prices around $180,000. Residents zipped up Interstate 275 for easy access to jobs in Cincinnati.

And so, a village known for being quaint and friendly — the story goes that it was named for the woman who operated the tollgate into town in the 1800s — found itself embroiled in a bitter fight.

Residents debated the village’s fate in dueling Facebook groups called “Wake Up,” “Free” and “Citizens to Save” Amelia. There were threats to boycott businesses. An anonymous letter urging residents to “defend our village” showed up in mailboxes. Mr. McCoy, the activist in favor of dissolving the village, stood outside a gas station in a clown suit, encouraging voters to “stop the clown show.”

 “This election was worse than any presidential election I’ve ever seen in my life,” said Steve Crawford, 56, who owns a flooring store and was among those who wanted to keep the village intact. He blamed much of the division on social media.

On Election Day, the vote to disband was decisive: 893-to-419. Whoops of celebration filled the night air. But there were also murmurs of regret. 

Amelia had its own police force, with a chief and six officers who knew many residents by name. Each week, a maintenance crew picked up leaves and other waste from yards. When a deer was struck by a car, “we’d come right out and pick it up,” Mayor Hart said.

Now, bigger townships will handle those kinds of services, raising fears among some residents that it could take the authorities longer to respond to drug overdoses or other emergencies.

But Johnny Parsons, 59, an insurance salesman, remained confident that the village did not provide anything he could not get for cheaper somewhere else. A supporter of President Trump, he celebrated by taping a piece of paper over his red hat so that it read “Make Amelia Great Again.”

“If you give people back more of their earnings, they can live a better lifestyle and buy things for their kids,” he said, instead of funding what he viewed as “endless stupidity and reckless spending.” A few doors down, Vickie Wenstrup, 60, a florist whose business sits just outside the town line, lamented the loss of the small touches that made the community feel like home. After Ms. Wenstrup was chosen to help decorate the White House for Christmas last year, the mayor issued a proclamation declaring a day in her honor. The proclamation hangs on the wall in her florist shop, next to a tile sign made by the local high school’s ceramics class.

That, she said, was the essence of “small-town America” and the kind of thing she feared would be missing in the new setup. Who would issue the next proclamation? Or hang military flags over the cemetery on Veterans Day? Would the annual toy drive for needy children at Christmas go on? “I’m very sad about it,” she said.  Even Ms. Gerber, the candidate for mayor who had originally pushed for the village to dissolve, was left with mixed emotions. On the same day that she was elected, the town voted to disband, making her, she joked, the “mayor-elect of ashes.”

(14)  We are currently experiencing unemployment claims at unprecedented levels, with many states potentially facing a shortfall in funds to pay claims in the near future.  In addition to expansion of the eligibility for unemployment, the Federal government also enacted the payroll protection program which was intended to provide funds for employers to continue to meet their payroll obligations.  The program is already coming under criticism.  If Congress enacts another relief package, how would you recommend these funds be distributed.  Please support your position using the fundamentals of R. Musgrave.



(15)  The COVID-19 crisis has impacted certain individuals and family units more than others.  The strain on the traditional safety net programs can be seen from an analysis of the preliminary data.



The change in the White House will likely lead to a different approach regarding the safety net and the programs which are provided.  Using the three roles of R. Musgrave, what would you recommend to the Federal government transition team as to correct for these inequities?  For each of the three roles, you should develop a proposal which you support and justify.

(16)  We know that voter participation in 2020 was well above the rates which were seen in the 2016 presidential elections.  Yet, history tells us that next year these rates will likely drop dramatically in what are equally important elections (mayor, local government representative).    The Teibout hypothesis helps explain local taxpayer fiscal decisions.  Explain the theory and describe how it could help us understand the lack of interest in local issues by taxpayers.

(17) This November, several states included on their respective ballots fiscal policy issues that would impact their State’s fiscal plan and taxpayers.  Pick two from this list, describing the proposal.  Is it progressive, regressive or proportional?  Your answer should indicate your understanding of these terms.   https://taxfoundation.org/2020-ballot-measure-election-results/


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