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The Impact of Federal and State Grants on Local Government Spending: a Test of the Fiscal Illusion Hypothesis

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  • Philip J. Grossman

    (West Virginia University)

Abstract

This article offers an empirical test of the fiscal illusion hypothesis. It is argued that, if fiscal illusion increases with the degree of separation in taxing and spending powers, then federal unconditional grants ought to have a greater stimulatory impact on local government spending than state unconditional grants. Data for the 136 counties and cities of Virginia were examined and evidence in support of this hypothesis is provided. Federal grants were found to be the primary source of the stimulatory impact of grants. At the minimum, federal unconditional grants have twice the stimulatory effect as state unconditional grants.

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Bibliographic Info

Article provided by in its journal Public Finance Review.

Volume (Year): 18 (1990)
Issue (Month): 3 (July)
Pages: 313-327

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Handle: RePEc:sae:pubfin:v:18:y:1990:i:3:p:313-327

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Cited by:
  1. Deller, Steven & Maher, Craig & Lledo, Victor, 2002. "Wisconsin Local Government, State Shared Revenues and the Illusive Flypaper Effect," Staff Paper Series, University of Wisconsin, Agricultural and Applied Economics 451, University of Wisconsin, Agricultural and Applied Economics.
  2. Eckel, Catherine C. & Grossman, Philip J. & Johnston, Rachel M., 2005. "An experimental test of the crowding out hypothesis," Journal of Public Economics, Elsevier, Elsevier, vol. 89(8), pages 1543-1560, August.
  3. Brian Knight, 2000. "The flypaper effect unstuck: evidence on endogenous grants from the Federal Highway Aid Program," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2000-49, Board of Governors of the Federal Reserve System (U.S.).
  4. Deller, Steven C. & Walzer, Norman, 1995. "Structural Shifts In The Treatment Of Intergovernmental Aid: The Case Of Rural Roads," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, Southern Agricultural Economics Association, vol. 27(02), December.
  5. Antti Moisio, 1998. "The effects of change in grants-in-aid regime and cuts on grants on municipalities' expenditures in Finland," ERSA conference papers ersa98p296, European Regional Science Association.
  6. Nelson Marconi & Paulo Arvate & João Moura Neto & Paulo Palombo, 2009. "Vertical transfers and the appropriation of resources by the bureaucracy: the case of Brazilian state governments," Public Choice, Springer, Springer, vol. 141(1), pages 65-85, October.
  7. Russell Sobel & George Crowley, 2014. "Do intergovernmental grants create ratchets in state and local taxes?," Public Choice, Springer, Springer, vol. 158(1), pages 167-187, January.
  8. Lars P. Feld & Christoph A. Schaltegger, 2004. "Voters as a hard budget constraint: On the determination of intergovernmental grants," Marburg Working Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 200418, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  9. Richard Scheffler & Richard Smith, 2006. "The impact of government decentralization on county health spending for the uninsured in California," International Journal of Health Care Finance and Economics, Springer, Springer, vol. 6(3), pages 237-258, September.
  10. Andrew Worthington & Brian Dollery, 1998. "The political determination of intergovernmental grants in Australia," Public Choice, Springer, Springer, vol. 94(3), pages 299-315, March.
  11. Steven C. Deller & Craig S. Maher, 2006. "A Model of Asymmetries in the Flypaper Effect," Publius: The Journal of Federalism, Oxford University Press, Oxford University Press, vol. 36(2), pages 213-229.
  12. Grossman, Philip J. & Mavros, Panayiotis & Wassmer, Robert W., 1999. "Public Sector Technical Inefficiency in Large U.S. Cities," Journal of Urban Economics, Elsevier, vol. 46(2), pages 278-299, September.
  13. James LeSage & Matthew Dominguez, 2012. "The importance of modeling spatial spillovers in public choice analysis," Public Choice, Springer, Springer, vol. 150(3), pages 525-545, March.
  14. Antti Moisio, 2002. "Determinants of Expenditure Variation in Finnish Municipalities," Discussion Papers, Government Institute for Economic Research Finland (VATT) 269, Government Institute for Economic Research Finland (VATT).

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