40 Pages Posted: 23 Sep 2012 Last revised: 22 Jul 2014
Date Written: May 8, 2013
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.
Keywords: fiscal federalism, conditional spending, state and local tax deduction, vertical externality, empirical tax law
Suggested Citation: Suggested Citation
Galle, Brian D., Does Federal Spending 'Coerce' States? Evidence from State Budgets (May 8, 2013). 108 Northwestern University Law Review 989 (2014); Boston College Law School Legal Studies Research Paper No. 276. Available at SSRN: https://ssrn.com/abstract=2150721 or http://dx.doi.org/10.2139/ssrn.2150721
By Andy Grewal