Local Government Consolidation in the United States By Dagney Faulk and Michael Hicks

Local Government Consolidation in the United States By Dagney Fa ...

Chapter 2:

Government Consolidation

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2. Fiscal differences within a region (intraregional differences) play a more significant role in the location decisions of firms.

3. Expenditures on public services (incorporating how tax revenues are used) are an important determinant of economic growth.

4. The interregional elasticity of economic activity with respect to taxes, a measure of the responsiveness of economic activity such employment growth or income to taxes, is between –0.1 and –0.6, which means that a 10% reduction in taxes leads to a 1% to 6% increase in business activity.

It is the mismatch between taxes and the quality of public services that is important. Residents and businesses shun areas that have high taxes and low quality of public services. Having a larger number of local governments allows for more tax–service quality combinations, so that residents and businesses may choose low taxes and a low level of public services or high taxes and a high quality of public services (or other combinations), according to their preferences. High taxes with a low quality of public services are unlikely to be a popular choice, and this is a problem for some local governments, particularly when they are adjacent to a low-tax jurisdiction.

Modeling Strategy

The appropriate size of local government units is a classic question in political science and political economy. Voters approve the consolidation of city and county governments when the perceived benefits of doing so outweigh the costs. The traditional cost-benefit framework is used to formalize the results of a ballot referendum on city-county consolidation. Although the costs and benefits of consolidation are difficult to measure, they can be linked to the characteristics of the existing governments and the populations they serve.

We propose that two local governments are likely to merge under certain conditions—if the merging city is a large component of the county in terms of its population or land area, if the city and county governments serve similar (homogeneous) constituencies, if the voters are familiar