Measuring Fiscal Condition as Need-Capacity Gap: An Illustration of State Aid to Counties in Michigan

Shu Wang

Municipal Finance Journal, 2023, vol. 43, issue 4, 43 - 63

Abstract: This paper uses the concept of fiscal gap, from the need-capacity framework of Yinger (1986) and Ladd (1994), as a way to conceptualize financial condition and as a guide for state aid allocation for fiscally distressed communities. Using 2011–2019 data from Michigan counties, it calculates local revenue-raising capacity and constructs a cost function that identifies key drivers for varying costs of public service provision between counties. Fiscal gap, which is the difference between RRC and cost measures, measures the extent to which local capacity falls short in meeting local demands. The paper also examines how state aid contributes to filling the fiscal gap. The results show that fiscal disparities exist among regions and counties with different levels of property taxable values. State aid, particularly project-based grants, mitigates these disparities but has yet to close the fiscal gap for many counties.

Date: 2023
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