Home Rule, Local Autonomy, And Municipal Government Behavior

This dissertation focuses on relationships between state and local governments. Of particular interest in this project is how the shift of power from the state to local governments changes local governments’ performance. This dissertation is comprised of four chapters. The first chapter briefly introduces the motivation and organization of the dissertation. The second chapter reviews the three state-imposed fiscal institutions—home rule, debt limitations, and tax and expenditure limitations, across states. While previous studies have looked at specific institutions, few studies have comprehensively reviewed the status of those institutions across states. This chapter attempts to fill this gap by comprehensively scrutinizing those institutions. The third chapter investigates the impact of home rule on municipalities’ revenues. Although long governed by “Dillon’s Rule” that makes localities a “creature” of the state, American municipalities have always desired at least some degree of local autonomy. One of the ways in which states grant autonomy to local governments ins through a designation of “home rule.” Most prior studies of the effects of home rule on local governance have focused on relating large municipalities. This chapter explores the effect of adopting home rule on small municipalities by looking at municipalities’ revenues. Focusing on Illinois municipalities, this chapter conducts a fuzzy regression discontinuity design to provide causal evidence. The empirical evidence shows that the adoption of home rule has a significant and large impact on the level of total own-source revenue, especially for local sales taxes and other taxes, but it has limited influence on property taxes. In addition, while home rule significantly increases revenue diversification for small municipalities, it has little influence on revenue stability. The fourth chapter investigates how home rule changes local governments’ performance by exploring its impacts on cities’ expenditure policy. Traditional theory predicts that local governments are more likely to place developmental expenditures policies ahead of either redistributive or allocational policies. Because they operate in an environment that they have to compete for residents and businesses to create their fiscal base. This chapter also conducts a fuzzy regression discontinuity design focusing on municipalities in Illinois where the adoption of home rule changes exogenously at a given population threshold. The empirical evidence shows that the adoption of home rule has significant and positive effects on allocational expenditures. Unlike the prediction of traditional theory, developmental and redistributive expenditures experience little change with the home rule power. This dissertation concludes by discussing implications and suggesting future research directions