Impact of Federal Transfers on State and Local Own-Source Spending

18 Pages Posted: 20 Nov 2015

See all articles by Eric Fruits

Eric Fruits

International Center for Law & Economics (ICLE); Portland State University; Economics International Corp.

Date Written: November 2015

Abstract

A large amount of economic research has examined the impact of federal grants on state and local spending. Much of this previous research, however, has focused exclusively on the impact of federal grants on total state and local spending itself rather than on the extent to which federal grants drive additional state and local spending and, in turn, drive demand for higher state and local taxes, fees, and other own-source revenues. Our study departs from earlier literature by examining the impact of federal transfers on state and local taxes and fees. This is the most comprehensive analysis to date, using information from U.S. states spanning the period from 1972 to 2012. Our results clearly demonstrate that federal transfers to state and local governments result in higher own-source revenue, taxes, and fees. Regression results indicate that state and local revenues from taxes, fees, and other own-sources will rise by 82 cents for each additional dollar in federal transfers. A hypothetical 10 percent increase in federal transfers would amount to about $62 billion to the states. Using our regression results, and holding personal income constant, this would be associated with approximately $50 billion in additional increased taxes, charges, or from other revenue sources, resulting an additional government burden of $158 per person.

Keywords: economics, fiscal policy, taxation

JEL Classification: E62

Suggested Citation

Fruits, Eric, Impact of Federal Transfers on State and Local Own-Source Spending (November 2015). Available at SSRN: https://ssrn.com/abstract=2692705 or http://dx.doi.org/10.2139/ssrn.2692705

Eric Fruits (Contact Author)

International Center for Law & Economics (ICLE) ( email )

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Portland, OR 97232
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HOME PAGE: http://laweconcenter.org/

Portland State University ( email )

United States

HOME PAGE: http://web.pdx.edu/~fruits/

Economics International Corp. ( email )

4318 NE Royal Court
Portland, OR 97213
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503-928-6635 (Phone)

HOME PAGE: http://www.econinternational.com/

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