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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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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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File URL: http://ecompapers.biz.uwa.edu.au/paper/PDF%20of%20Discussion%20Papers/1988/88-07.pdf
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File URL: http://dx.doi.org/10.1177/109114219001800304
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Bibliographic Info

Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number archive-11.

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Length: 15 pages
Date of creation: 1990
Date of revision:
Publication status: Published in Public Finance Review July 1990 vol. 18 no. 3 313-327
Handle: RePEc:mos:moswps:archive-11

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Postal: Department of Economics, Monash University, Victoria 3800, Australia
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Web page: http://www.buseco.monash.edu.au/eco/
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Cited by:
  1. 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.
  2. Lars P. Feld & Christoph A. Schaltegger, 2005. "Voters as a Hard Budget Constraint: On the Determination of Intergovernmental Grants," CREMA Working Paper Series 2005-21, Center for Research in Economics, Management and the Arts (CREMA).
  3. 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).
  4. Steven Deller & Craig Maher & Victor Lledo, 2002. "Wisconsin Local Government, State Shared Revenues and the Illusive Flypaper Effect," Wisconsin-Madison Agricultural and Applied Economics Staff Papers 451, Wisconsin-Madison Agricultural and Applied Economics Department.
  5. Worthington, Andrew C & Dollery, Brian E, 1998. " The Political Determination of Intergovernmental Grants in Australia," Public Choice, Springer, Springer, vol. 94(3-4), pages 299-315, March.
  6. João Silva Moura Neto & Nelson Marconi & Paulo Eduardo Moledo Palombo & Paulo Roberto Arvate, 2006. "Vertical Transfers And The Appropriation Of Resources By The Bureaucracy: The Case Of Brazilian State Governments," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of G 136, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  7. 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.
  8. 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.
  9. 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.
  10. 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.).
  11. 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.
  12. 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.
  13. 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.
  14. Eckel, Catherine C. & Grossman, Philip J. & Johnston, Rachel M., 2005. "An experimental test of the crowding out hypothesis," Journal of Public Economics, Elsevier, vol. 89(8), pages 1543-1560, August.

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