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

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.

Graphical analysis supports the statistical analysis and suggests that each additional dollar in federal transfers is associated with an increase in state and local taxes and fees of 74 – 88 cents.

Recent peer-reviewed research published in the widely cited academic journal Public Choice supports our findings by concluding that each dollar of additional federal grants to states is associated with a total increase of 54 – 86 cents in new state and local taxes.

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