Optimal fiscal policy for a state or local government

State and local government services are enjoyed by, and taxes borne by, two groups, residents and non-residents. This paper addresses the question: if state and local governments maximize their residents' welfare, and cannot distinguish between individual residents and non-residents but know the aggregate characteristics of the two groups, what set of taxes (subsidies) and public goods should they choose? Some of the results obtained are: (i) even when all commodities are taxable and equity is ignored, the existence of non-resident consumption makes uniform taxation non-optimal; (ii) in some cases, whether a commodity should be taxed or subsidized is independent of its own-price elasticity; (iii) central cities may be subsidized by suburban residents; and (iv) the ability of state and local governments to redistribute is inversely proportional to the openness of the economy.