The Politics of State-Local Fiscal Relations
Jeffrey M. Stonecash
The finances of state and local governments are closely connected. The states have legal control of local financial practices and provide much of the revenue of local governments. The states also are responsible for the creation of multiple local governments, which differ greatly in local tax bases that support services. The limited resources of local governments and disparities of tax bases often produce calls for states to do more to help their local governments. These demands have led to a gradual but steady expansion of state involvement in local affairs during the twentieth century. This growth has been accelerated by actions of the national government. However, the rate and timing of expansion varies from state to state, reflecting patterns of party control.
State and local finances are fundamentally intertwined. Legally speaking, local governments depend on state government. State governments create counties, municipalities, towns, villages, school districts, and special districts. The state also grants each of these local governments the power to tax and borrow. This power is used in almost all states to regulate what kinds of taxes may be imposed, maximum levels of taxation and debt, and what kinds of borrowing may occur ( ACIR 1978; Stonecash 1981b; Kenyon 1989).
The states also determine which level of government can use various kinds of taxes. States generally reserve the income tax for state use. The sales tax is also a state tax, though many states allow local governments to impose additional percentages of the sales tax for local use. Property taxes are generally reserved for local governments.