A Computable General Equilibrium Model of Intergovernmental Aid

This paper introduces a computable general equilibrium model of intergovernmental relations in which heterogeneous agents (i) are endowed with income and houses, (ii) are fully mobile between multiple jurisdictions, and (iii) vote in both local and state elections to determine local property and state income tax rates. The model is calibrated to New Jersey micro tax data and used to study the general equilibrium effects of state government policies. Three different types of intergovernmental programs are analyzed: (i) redistributive revenue sharing, (ii) district power equalization and (iii) deductibility of local taxes. The approach facilitates a heretofore difficult comparative analysis in that it provides for an integrated investigation of these programs in a single general equilibrium model.