State and Local Governments: Why They Matter and How to Finance Them

A chapter in The Oxford Handbook of State and Local Government Finance (2012)


State and local government fiscal systems have increasingly become vulnerable to economic changes. Over the past three decades, state and local deficits during economic recession have been larger and deeper each time. The impact of the Great Recession and its aftermath of feeble growth and lingering high unemployment has been dramatic both in scope and intensity. Before the crisis, long-term structural deficits were persistent for both individual governments and the entire sector as spending plans and patterns outpaced governments’ revenue-generating capacity. The revenue systems of these governments eroded while the workloads and scope on the expenditure side of the state and local system budget continued to grow.

The Oxford Handbook of State and Local Government Finance (2012) – edited by Robert D. Ebel and John E. Petersen – evaluates the persistent problems in the fiscal systems of state and local governments. Each chapter provides a description of the discipline area; examines major developments in policy, practices and research; and opines on future prospects.

A chapter titled “State and Local Governments: Why they Matter and How to Finance Them” by Serdar Yilmaz, François Vaillancourt and Bernard Dafflon explores conditions to ensure that the decentralized public service providers have the financial means of carrying out their mandate, such as through own source revenues and intergovernmental transfers. In setting the appropriate own source revenue, provider depends on the type of goods and services offered. Meanwhile, the transfer scheme should be carefully designed as it will reflect both vertical and horizontal imbalances as well as the degree of solidarity between regions.

Read the full chapter here.