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Changing Needs, Sticky Budget: Evidence From the Geographic Distribution of U.S. Federal Grants

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  • Valentino Larcinese
  • Leonzio Rizzo
  • Cecilia Testa

Abstract

Most U.S. federal grants are allocated through arguably obsolete formulas, leading fast growing states to contend that they are not receiving their fair share of such grants. We examine this issue by analyzing the allocation of formula and non-formula grants during the period 1978–2008. We find that states with fast growing populations are penalized in the allocation of formula grants, whereas for non-formula grants population dynamics does not play a significant role. The estimated losses are sizable and heavily concentrated among the three fastest growing states — Nevada, Arizona, and Florida. Nevertheless, the majority of the U.S. states benefit from formula allocation, thus providing a plausible explanation for the status quo bias in budgetary formulas.

Suggested Citation

  • Valentino Larcinese & Leonzio Rizzo & Cecilia Testa, 2013. "Changing Needs, Sticky Budget: Evidence From the Geographic Distribution of U.S. Federal Grants," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(2), pages 311-342, June.
    • Handle: RePEc:ntj:journl:v:66:y:2013:i:2:p:311-342
    DOI: 10.17310/ntj.2013.2.02
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    1. Solé-Ollé, Albert & Sorribas-Navarro, Pilar, 2008. "The effects of partisan alignment on the allocation of intergovernmental transfers. Differences-in-differences estimates for Spain," Journal of Public Economics, Elsevier, vol. 92(12), pages 2302-2319, December.
    2. Brian Knight, 2008. "Legislative Representation, Bargaining Power and the Distribution of Federal Funds: Evidence from the US Congress," Economic Journal, Royal Economic Society, vol. 118(532), pages 1785-1803, October.
    3. Valentino Larcinese & Leonzio Rizzo & Cecilia Testa, 2005. "Allocating the US Federal Budget to the States: the Impact of the President," STICERD - Political Economy and Public Policy Paper Series 03, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    4. Brian Knight, 2002. "Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program," American Economic Review, American Economic Association, vol. 92(1), pages 71-92, March.
    5. Besley, Timothy & Case, Anne, 1995. "Incumbent Behavior: Vote-Seeking, Tax-Setting, and Yardstick Competition," American Economic Review, American Economic Association, vol. 85(1), pages 25-45, March.
    6. Weingast, Barry R., 2009. "Second generation fiscal federalism: The implications of fiscal incentives," Journal of Urban Economics, Elsevier, vol. 65(3), pages 279-293, May.
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    Cited by:

    1. Ross Hickey, 2015. "Intergovernmental transfers and re-election concerned politicians," Economics of Governance, Springer, vol. 16(4), pages 331-351, November.
    2. Juan Serrato & Philippe Wingender, 2016. "Estimating Local Fiscal Multipliers," Working Papers id:11109, eSocialSciences.

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