Does More Federal Environmental Funding Increase or Decrease States’ Efforts?: Evidence on Flypaper Effects from American Federalism

Abstract

We estimate the demand for federal grants-in-aid to the states. Specifically, we analyze the flow of funds from the U.S. Environmental Protection Agency (EPA) to the states as a function of the structure of state political institutions, the political preferences of citizens and elected officials, the state's economic characteristics, and presence of several types of pollutants. We simultaneously model two dependent variables (the flow of EPA funds, and state environmental and natural resource budgets) to identify the independent causation of the two processes. Our results show that the flow of federal funds to states is greater under Democratic control of the state legislature and when the state has pro-environmental members in Congress. State environmental and natural resources spending is greater under Democratic control of the state legislature and when there are more conservation group members in the state. Republican control of the legislature, a larger manufacturing sector, and higher per capita income all lower state spending. For both dependent variables we find a variety of demographic and environmental quality effects. In contrast, we find no direct evidence for either flypaper or crowding out effects between federal funds and state spending.

Keywords: Fiscal Federalism, Environmental Policy, Political Economy

JEL Classification: Q2, K32, E62, D72, D73