The Equalization Equivalence of Flat Grants and Foundation Programs: A Reply and an Extended Analysis

This paper provides a rejoinder to a recent article by Talley, and shows that the “error†he demonstrates stems from his inability to perceive the nature of tax bases at different levels of government within a fiscal federalism. Talley does, however, express (at least implicitly) some proper concern over the effects of different tax bases at local and state levels, e.g., in school finance it is usual to find local districts levying against a property base and the state levying against income and/or sales. A careful examination of the effects of introducing this difficulty into the analysis yields the following rather intriguing conclusion. The different flat grant formulas do produce different redistributive results at the level of the individual resident. It does not matter when local governments are the units under equalization (redistribution) inspection whether or not central (state) governments levy on tax bases different from those employed by local (school district) governments.