February 26, 2015

State and Local Funding

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States have varying degrees of decentralization, with some states relying more heavily on state spending while others rely more on local government spending. Looking just at expenditure ratios, Florida relies relatively more on local governments than on state government. Table 14 shows that for 2012, the most recent year in the table, state government spending was 38.6 percent of state plus local spending, compared to the national average of 47.4 percent. Looking back to 1992, Florida’s ratio of state-to-state and local spending has been consistently below the national average, although in both cases the two-decade trend has been for states to increase their expenditures relative to those of local governments. At the national level the trend has been consistently upward, whereas in Florida, the state government share of state plus local spending peaked in 2005.

It appears that state government expenditures in Florida are relatively low because local governments take on more of the burden, but a closer look reveals that this is not the case. Florida’s state government expenditures are well below the national average. If the state government spent the national average, state government expenditures would be 54.7 percent higher.[1] Holding local expenditures constant, if state expenditures were that much higher, the state share of state plus local spending would be 56.3 percent, placing Florida above the national average. Thus, not only is state spending in Florida below the national average, local government spending is too. State spending in Florida is not low because local governments are shouldering more of a burden than in other states.

There is some evidence that states that are more decentralized and have a smaller state government share of state plus local government spending tend to have lower levels of government expenditures overall.[2] The reason is that greater decentralization means more intergovernmental competition among local governments. There is widespread acceptance of this idea among economists, although some see the intergovernmental competition as a good thing that forces governments to be more efficient and take more seriously the preferences of their citizens, while critics call it a race to the bottom as jurisdictions lower their taxes and cut services with the idea that they can “free ride” off the services of nearby governments.

[1] Florida expenditures and the national average for 2011 are taken from “Total State Expenditures per Capita,” Kaiser Family Foundation website, accessed September 11, 2014, http://kff.org/other/state-indicator/per-capita-state-spending/.

[2] See Randall G. Holcombe and DeEdgra W. Williams, “The Cartelization of Local Governments,” Public Choice 149, nos. 1/2 (October 2011): 65–74, and the references in that article.