The Effect of Federal Intergovernmental Grants on State Taxes: New Evidence of Budget Persistence

37 Pages Posted: 29 Sep 2014

Date Written: May 30, 2013

Abstract

I examine whether federal intergovernmental grants have a persistent long-term effect on state fiscal policy. A simple theoretical framework is developed based on the median voter model and is structurally estimated based on a 30-year panel of U.S. federal grants and state tax revenues. In both OLS and IV estimates I find evidence that temporary federal aid has a persistent effect on state finances. Each $1 of federal grants predicts eventual state tax increases of between $0.04 and $0.17. These effects are most evident on state personal income and corporate income taxes. There is some evidence that state tax and expenditure limitations (TELs) and supermajority voting rules mitigate these effects. To address possible endogeneity of federal grants I employ an instrumental variables strategy which yields similar results. Consistent with previous literature I find state budgets respond asymmetrically with respect to increases and decreases in federal grants, with temporary grant-funded expenditures persisting over time in state budgets.

Keywords: Fiscal federalism, intergovernmental grants, budget asymmetry

JEL Classification: H77, H20, H71

Suggested Citation

Chamberlain, Andrew, The Effect of Federal Intergovernmental Grants on State Taxes: New Evidence of Budget Persistence (May 30, 2013). Available at SSRN: https://ssrn.com/abstract=2502629 or http://dx.doi.org/10.2139/ssrn.2502629

Andrew Chamberlain (Contact Author)

Glassdoor, Inc. ( email )

100 Shoreline Highway
Mill Valley, CA 94941
United States

HOME PAGE: http://www.glassdoor.com/research/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
47
Abstract Views
374
PlumX Metrics