How Safe Is the Local Safety Net? Fiscal Distress, Public Spending, and the Budgetary Repercussions of Capital Convictions

Control of public spending and revenues is increasingly being left to states and localities. In order to understand the consequences of such a movement on the distribution of social spending, it is necessary to understand how fiscal distress will affect state and local budgets. This paper exploits the large and unexpected negative shock to county budgets imposed by the presence of capital crime trials, first to understand the real incidence of the cost of capital convictions, and second to uncover the effects of local fiscal distress on the level and distribution of public spending and revenues. I show that these trials are quite costly relative to county budgets, and that the costs are borne in part by reducing expenditures on highways and police and in large part by increasing taxes. The results highlight the vulnerability of county budgets to fiscal shocks: each trial causes an increase in county spending of 1.8 percent and an increase in county revenues of 1.6 percent, implying an increase of more than $1.6 billion in both expenditures and revenues between 1982 and 1997. Using these trials as a source of exogenous variation to examine inter-jurisdictional spillovers, I find significant spillovers of both spending and revenues between counties.