Does Federal Spending 'Coerce' States? Evidence from State Budgets

Abstract:     
According to a recent plurality of the U.S. Supreme Court, the danger that federal taxes will “crowd out” state revenues justifies aggressive judicial limits on the conditions attached to federal spending. Economic theory offers a number of reasons to believe the opposite: federal revenue increases may also float state boats. To test these competing claims, I examine for the first time the relationship between total federal revenues and state revenues. I find that, contra the NFIB plurality, increases in federal revenue -- controlling, of course, for economic performance and other factors -- are associated with a large and statistically significant increase in state revenues.

This version of the study additionally provides extensive background explanations of underlying economic concepts for readers unfamiliar with the prior public finance literature.

Number of Pages in PDF File: 55

Keywords: fiscal federalism, conditional spending, state and local tax deduction, vertical externality, empirical tax law

Accepted Paper Series