Local Fiscal Autonomy Requires Constraints: The Case for Fiscal Menus

Abstract

In this paper, I argue that we should replace poorly designed fiscal rules constraining cities and other local governments. For example, instead of requiring a local supermajority to issue debt, localities should only be able to issue relatively safe forms of debt. Abolishing the old rule enhances local autonomy, while instituting the new rule channels localities away from the poor outcomes that reasonably motivated the (ineffective) old rule. The ultimate rationale for the shift is that localities should not have their fiscal autonomy hamstrung because there are specific issues, such as the design of financial instruments, over which they are at a comparative disadvantage. The specific limitations governing localities should be – and can be – designed to address specifically the limitations that local governments actually have. It is not a coincidence that many of the crude rules to be replaced date from the nineteenth century. I conclude by applying this reasoning to another area in which localities are constrained by poorly designed and overbroad fiscal rules: taxation. On taxation, I arrive at a similar conclusion. Localities should be much freer to raise taxes, particularly property taxes, but they should be constrained in their design of taxes, particularly tax bases.

Keywords: fiscal federalism, municipal finance, local debt, local taxes