Fiscal Institutions,Credit Ratings,and Borrowing Costs

This paper investigates the impact of fiscal institutions on state government borrowing costs. We find that institutions have both a direct and indirect effect on interest costs paid by state governments. Revenue limits are associated directly with higher interest costs; expenditure limits, stricter balanced budget rules, and restrictions on state debt issuance are indirectly associated with lower interest costs because they lead to higher credit ratings. It appears that investors and bond raters incorporate information on fiscal institutions into their assessment of state government credit quality.     

Using Fuzzy Rule–Based Systems to Evaluate Overall Financial Performance of Governments: An Enhancement to the Bond Rating Process

Credit ratings remain a key feature of municipal debt management. The primary objective of this article is to develop a new methodology for evaluating the financial performance and creditworthiness of governments and to illustrate this approach for a sample of large American cities. Specifically, we develop a fuzzy rule–based system (FRBS) that uses economic, debt, and other financial information as well as a measure of financial management to produce rankings of city financial performance. The FRBS credit ratings are highly correlated with actual Moody's ratings for these cities. FRBS have the potential of enhancing the rating process by standardizing the information used and encouraging consistent rules about what combinations of inputs result in good, fair, or poor performance.     

Wealth-Transfer Taxes in U.S. Fiscal Federalism: A Levy Still in Need of Reform

Wealth-transfer taxes are federal and state levies on the valueof estates, inheritances, and gifts. Because the federal governmentallows a limited tax credit, repeal of the federal tax has implicationsfor state governments. This article discusses the economic justificationof taxing wealth transfers and provides data on the importanceof the tax from 1977 to 1997. We measure the degree of variationin the use of the tax among the states and pinpoint those statesfor which death taxation is most important. Wealth-transfertaxation needs reform but, repeal of the federal tax is inappropriate.Instead, the state levies should be abandoned. We conclude byproposing to repeal the state taxes and reduce the federal taxby an amount equivalent to the value of the federal tax-credit.The resulting revenues, however, would not to be garnered bythe federal government but returned as revenue-sharing fundsto the resident state of the decedent.     

Tax Increment Debt Finance: An Analysis of the Mainstreaming of a Fringe Sector

Despite the persistent efforts of federal tax policymakers to place binding constraints on the economic development bond market in the United States, it has grown since the Tax Reform Act of 1986 and is a well established segment of the municipal securities market. This article provides an analysis of the development bond market by describing tax increment debt finance (TIF) in the United States and conducting an empirical analysis of California TIF debt. Our analysis indicates that tax increment debt finance (TIF) is no longer an obscure infrequently used financing tool, but for local governments in many states is a commonly used means of raising capital for multiple purposes. Our empirical analysis highlights the unique project-specific features of tax increment finance that bond issuers must understand and manage to enhance the credit quality and minimize the financing costs of tax increment debt.     

“Robin Hood” and Texas School District Borrowing Costs

The “Robin Hood” system of school financing in Texas takes property tax funds from wealthy school districts and gives them to poorer districts. This paper examines Permanent School Fund‐insured, school district debt and discovers that under the “Robin Hood” system, Texas school districts with either Aa or A1 underlying credit ratings have higher borrowing costs than districts with lower ratings. Also, the borrowing costs of Texas school districts with underlying credit ratings of Aa and A1 are higher than those for non‐Texas, privately insured school districts with the same ratings, while the borrowing costs of A and Baa‐rated Texas school districts are lower.     

The real costs of tuition tax credits

Calculations of the costs of tuition tax credits should include estimates of the induced migration from public to private schools. The estimate by the President's advisors that his 1983 tax credit proposal would cost up to $800 million by 1986 neglected the migration factor. It is demonstrated that a migration from public to private schools of about from 1 to 1.4% of the present public school enrollment is all that is necessary to secure savings from migrants that just offset the loss in federal tax revenue from tax credits granted to incumbent private school families. Greater migration will generate net revenue gains to governments as a whole.     

Utilization of Employment Tax Credits: An Analysis of the Empowerment Zone Wage Tax Credit

This paper provides estimates of utilization for the Empowerment Zone (EZ) wage tax credit, a subsidy claimed by employers who operate in and hire residents of federally designated areas experiencing economic distress. The EZ credit is currently the largest employer‐based wage tax credit in the federal tax code in terms of dollars claimed, with almost $250 million claimed in 2002. I show that about 6.4 percent (and at least 3.5 percent) of the working age population was claimed under the EZ wage credit in 1999. In addition, I estimate that 24.2 percent (and at least 13.1 percent) of those employed inside of the target area were claimed for the credit. I create these national estimates of use with information on credit dollars claimed from the Internal Revenue Service and population data on the eligible population from the census. These measures of tax credit use are an alternative to the use rate of firms that are presented in the existing literature, and reveal how effective the credit is at reaching residents of the target area.     

Federal Intervention in the Municipal Bond Market: The Effectiveness of the Build America Bond Program and Its Implications on Federal and Subnational Budgeting

The American Recovery and Reinvestment Act of 2009 (ARRA) included several new federal programs intended ostensibly to “unfreeze” the credit markets as a result of the global financial crisis. One such program, the Build America Bond (BAB) program, aimed to lower the borrowing costs for state and local governments by increasing their access to capital and providing a more generous federal subsidy than the traditional indirect tax exemption subsidy. BABs are taxable bonds sold by subnational governments, which carry a 35 percent direct federal payment subsidy to the borrower. In creating this program, the federal government hoped that the large direct federal subsidy along with greater potential investor interest in taxable securities would result in lower borrowing costs for state and local governments vis‐à‐vis traditional tax‐exempt bonds. This research study examines the relative effectiveness of the BAB program and details the various quantitative and qualitative implications on federal and subnational budgeting by moving from an indirect to a direct federal subsidy approach in facilitating state and local government capital raising.     

Much Ado about Nothing? The Size and Credit Quality Implications of Municipal Other Postemployment Benefit Liabilities

This paper presents estimates of the size and scope of other postemployment benefit (OPEB) liabilities among municipal governments. The findings indicate these liabilities vary substantially, ranging from less than a dollar per capita to more than $2,000 per capita. Those liabilities were then incorporated into separate models of credit ratings and borrowing costs. Results suggest OPEB liabilities do not directly affect credit quality, but the interaction between an issuer's fiscal capacity to address its liability does have a notable effect.     

The Demise of Tax Credits

Introduced in the late 1990s, tax credits grew under successive Labour governments to become a cornerstone of UK social policy. Distinguished from traditional welfare policies by their target group and their mode of administration, and with goals that appeared capable of commanding support across the ideological spectrum, tax credits until recently seemed to hold the key to tackling poverty in a politically popular manner. But since 2010 the tax credit system has been systematically dismantled, initially qualitatively and latterly also quantitatively. This paper discusses the multiple factors that help to explain the rapid fall from grace in the UK of this liberal approach to supporting the incomes of poor working households.     

Tax and expenditure limitations and the fiscal relationships between state and local governments

This paper uses comprehensive data on state and local tax and spending limitations for forty-nine states between 1976 and 1990 to estimate the effects of these limits on the fiscal relationships between state and local government. Results indicate that tax and spending limits on local governments are only partially effective in reducing revenues because political agents bypass limitations by transferring revenue reliance to unconstrained revenue sources, or because unconstrained levels of government take on additional revenue responsibilities. In particular, the empirical analysis demonstrates that binding local government fiscal constraints are associated with reductions in local revenues and increases in state aid to local governments. In contrast, state government limitations are related to reductions in both state and local own source revenues.     

Fiscal Policy,Deficits and Politics of Subnational Governments: The Case of the German Laender

The first part of the paper briefly describesinstitutional aspects of the German federal system andexamines the economic and fiscal performance of theGerman Laender since 1970. Taking into account theinstitutional settings, especially the fact that theGerman Laender cannot set tax rates individually, wedevelop a highly stylized model of subnationalgovernments that do not have access to the tax rateinstrument and thus have to use expenditures as apolicy variable. The model implies an expendituresmoothing policy of subnational governments andcomplements the famous tax smoothing model. Theempirical section examines whether governments ofvarious ideology show significant differences infiscal stabilization policy. Our results indicatethat regional differences in public debt accumulationand public expenditure policy in general is largelydetermined by interregional differences in economicperformance, whereas we do not find any significantimpact on the ideological composition of the Laendergovernments.     

Do social policy reforms have different impacts on employment and welfare use as economic conditions change?

This paper uses March Current Population Survey data from 1985 to 2004 to explore whether social policy reforms implemented throughout the 1990s have different impacts on employment and welfare use depending on economic conditions, a topic with important policy implications but which has received little attention from researchers. I find evidence that many reforms operate differently as labor market conditions fluctuate. Although social policies increase employment during economic slowdowns, the largest effects are generated in favorable labor market conditions. The impact of time limits, mandatory job search, and cash diversion programs are particularly sensitive to the macroeconomy, while the earned income tax credit is associated with similar employment effects in most environments. The results vary substantially across policy “carrots” and “sticks,” levels of work intensity, and subsamples of single mothers, but a tentative conclusion is that a strong economy reinforces the positive incentives created by social policy reforms. © 2008 by the Association for Public Policy Analysis and Management.     

The redistributive impact of hypocrisy in international taxation

Why do tax havens, whose attractiveness for foreign investors depends upon financial secrecy, agree to automatically report account data to foreign governments? From a contractualist perspective, their cooperation should be motivated by the expectation of joint gains. Prior to such agreement, however, tax havens expected outflows of foreign capital and reductions in economic activity as likely outcomes. We show that the United States (US) imposed automatic information exchange on these countries without itself participating. The result is a strongly redistributive regime that worsens the economic situation of tax havens. By means of a difference‐in‐differences analysis, we ascertain a substantial and statistically significant negative effect of a US sanction threat on the value of assets held by foreigners in tax havens relative to non‐havens. The effect becomes stronger when the US is included in the non‐haven group. The analysis confirms the US's ability to redistribute financial wealth internationally through organized hypocrisy.     

Government‐wide Financial Statements and Credit Risk

Now that state governments issue comprehensive annual financial reports in accordance with Statement No. 34 of the Governmental Accounting Standards Board, it is possible to generate a consistent and comprehensive set of government‐wide financial information. We use the information to develop financial ratios to benchmark government financial performance from information beyond the traditional general fund, and test the hypothesis that such information is incorporated into the assessment of credit risk. We provide an empirical analysis of the incorporation of government‐wide financial information into state government credit ratings, which provides a positive empirical test of the theory of certification and demonstrates how information from the government‐wide financial statements is infused into financial markets.     

Tax decentralization and local government size

This paper investigates the relationship between fiscal federalism and the sizes of local governments. While many empirical studies emphasized that grants encourage the growth of local public spending and local taxes constrain it, they are more silent regarding the effects of different types of tax autonomy. The paper addresses this issue by arguing that tax decentralization as organized on tax bases used only by local governments (tax-separation), rather than on tax-base sharing, would restrain local public expenditures. Using an unbalanced panel of OECD countries, the key finding is that only property taxes—mostly based on a “tax-separation” scheme—seem to favor smaller local governments. Thus, while tax decentralization is a necessary condition for limiting the growth of local governments, it does not appear sufficient, as tax-separation schemes among government levels would in fact be required.     

经济开放对地方财政收入规模及结构的影响实证分析

使用中国1999—2007年度省级面板数据,实证分析了经济开放对地方财政收入规模和内部相对结构变化的作用。研究表明:贸易开放度的提高显著增加了地方个人所得税、行为税、财产税和非税收入,整体上也引起地方财政总收入的增加;并使地方财政收入中个人所得税、财产税和非税收入比重上升,城建税收入比重下降。投资开放的提升显著增加了地方营业税、个人所得税、行为税、非税及预算外收入,同时减少了地方增值税和企业所得税收入,总体上对地方财政收入有负效应;并提高了地方财政收入中营业税、个人所得税、行为税、财产税、非税收入及预算外收入的比重。由于外资和外贸对经济及税基的作用差异、现行分税制、地方各项财政收入自身特征、地方政府基于多元目标为促进外资投资呈现出的策略行为等,使经济开放对地方各项财政收入规模及其相对结构的影响具有复杂和非一致性。     

Fiscal Management Implications of the TABOR Bind

Following a wave of state-adopted tax and expenditure limitations (TELs), in 1992 the state of Colorado amended its constitution with the strictest TEL to date. Called the Taxpayer Bill of Rights and known as TABOR, the amendment has limited the size and scope of Colorado governments. Praised as a restraint on unbridled government growth in good economic times, TABOR reared its highly restrictive head as the state economy turned downward. The central issue explored is how binding tax and expenditure limitations affect the state's ability to weather economic recessions and employ sound fiscal management practices. As in most institutional arrangements, the devil is in the details. The analysis presented here reveals that binding limitations create perverse incentives for budgetary actors to earmark, privatize, and shift responsibilities to other jurisdictions, which ultimately combine to reduce the state government's ability to perform and to maintain sound fiscal management practices.     

Fiscal Structure and the Post-Proposition 13 Fiscal Regime in California's Cities

Two and a half decades after the passage of Proposition 13 in 1978, California state and local governments continue to feel the intended and unintended effects of tax and expenditure limitations. While considerable time has passed since voters enacted Proposition 13, the effects of the property tax revolt continue to be dramatic. This article examines the fiscal structure of California's city governments from 1972 to 2002. The analysis reveals that California's cities have become less reliant upon property tax revenues and more reliant upon charges and fees, and have not increased reliance upon sales tax revenues as much as expected.     

Unintended Consequences of Local Sales Tax: Capitalization of Sales Taxes into Housing Prices

Local governments are under pressure to look for alternatives to property taxes as their main revenue source. One response has been to adopt local sales taxes. Prior studies offer little guidance on whether and how much local governments enhance their revenue capacity with local sales taxes. This article unveils the underlying mechanisms by exploring the capitalization of sales taxes into housing prices as a property tax base measure. The empirical analysis reveals a capitalization of local sales taxes into housing prices, indicating the reduction of property tax bases in higher sales tax areas from the long-term perspective. The findings suggest that a sales tax rate increase might not raise local revenue capacity as much as policymakers intend.