Federal grants, earmarked revenues, and budget crowd-out: State highway funding

Public Budgeting and Finance

Volumn 29, Issue 2, 2009, Pages 94-110

  Nesbit, Todd M ^a   Kreft, Steven F ^b  

^a Department of Management Information Systems   (United States)

^b INDIANA UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 66949133565     PISSN: 02751100     EISSN: 15405850     Source Type: Journal    
DOI: 10.1111/j.1540-5850.2009.00930.x     Document Type: Article

References (61)

1. Shama Gamkhar, "Is the Response of State and Local Highway Spending Symmetric to Increases and Decreases in Federal Highway Grants?," Public Finance Review 28, no. 1 (2000): 3-25.
2. Shama Gamkhar, "The Role of Federal Budget and Trust Fund Institutions in Measuring the Effect of Federal Highway Grants on State and Local Government Highway Expenditure," Public Budgeting and Finance 23, no. 1 (2003): 1-21.
3. Census of Governments, 2002.
4. Taking the 80-20 federal to state matching basis as given by the Federal Highway Administration in its Highway Statistics publication we tested to ensure that within our sample states spend beyond the necessary spending cap to cause the matching rate nonbinding. In examining our full panel of data, all observed state highway spending levels were beyond the implied spending cap (observed federal aid/0.8). To add robustness to our test, we assumed a 65-35 federal to state matching basis, increasing the state percent funded, and still all observed state highway spending levels were beyond the implied spending cap (observed federal aid/0.65).
5. David Bradford and Wallace Oates, "Towards a Predictive Theory of Intergovernmental Grants," American Economic Review 61, no. 2 (1971): 440-448.
6. James Hines and Richard Thaler, "Anomalies: The Flypaper Effect," Journal of Economic Perspectives 9, no. 4 (1995): 217-226.
7. Edward Gramlich, "Intergovernmental Grants: A Review of the Empirical Literature," in The Political Economy of Fiscal Federalism, ed. Wallace Oates (Lexington, MA: Heath Lexington, 1977): 219-239.
8. Wallace Oates, "Federalism and Government Finance," in Modern Public Finance, ed. J. Quigley and E. Smolensky (Cambridge, MA: Harvard University Press, 1994): 126-151.
9. Stephen Bailey and Stephen Connolly, "The Flypaper Effect: Identifying Areas for Further Research," Public Choice 95, no. 3-4 (1998): 335-361.
10. Hines and Thaler, 218-220.
11. Brian Knight, "The Flypaper Effect Unstuck: Evidence on Endogenous Grants from the Federal Highway Aid Program," Federal Reserve Board (September 2000).
12. Robert Inman, "Towards an Econometric Model of Local Budgeting," in Proceedings of the 64th Annual Conference on Taxation (Lexington, KY: National Tax Association, 1971): 699-719.
13. John Weicher, "Aid, Expenditures, and Local Government Structure," National Tax Journal 25 (1972): 573-583.
14. Ibid.
15. Edward Gramlich and Harvey Galper, "State and Local Fiscal Behavior and Federal Grant Policy," Brookings Papers on Economic Activity 1 (1973): 15-58.
16. Ibid.
17. John Bowman, "Tax Exportability, Intergovernmental Aid, and School Finance Reform," National Tax Journal 27 (1974): 163-173.
18. Ibid.
19. Martin Feldstein, "Wealth Neutrality and Local Choice in Public Education," American Economic Review 65 (March 1975): 75-89.
20. Philip Grossman, "The Impact of Federal and State Grants on Local Government Spending: A Test of the Fiscal Illusion Hypothesis," Public Finance Quarterly 18 (1990): 313-327.
21. George Olmsted, Arthur Denzau, and Judith Roberts, "We Voted for This? Institutions and Educational Spending," Journal of Public Economics 52 (1993): 345-362.
22. Anne Case, James Hines, and Harvey Rosen, "Budget Spillovers and Fiscal Policy Interdependence: Evidence from the States," Journal of Public Economics 52 (1993): 285-307.
23. Elizabeth Becker, "The Illusion of Fiscal Illusion: Unsticking the Flypaper Effect," Public Choice 86 (1996): 82-102.
24. Shama Gamkhar and Wallace Oates, "Asymmetries in the Response to Increases and Decreases in Intergovernmental Grants: Some Empirical Findings," National Tax Journal 49, no. 4 (1996): 501-512.
25. Brian Knight, "Endogenous Federal Grants and Crowd-Out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program," American Economic Review 92, no. 1 (2002): 71-92.
26. Gamkhar, "Response of State and Local Highway Spending," 13-19.
27. Gamkhar, "Role of Federal Budget," 11-17.
28. Knight, "Flypaper Effect Unstuck," 37.
29. Harry Meyers, "Displacement Effects of Federal Highway Grants," National Tax Journal 40, no. 2 (1987): 221-235.
30. Case, Hines, and Rosen suggest that state expenditures are spatially dependent. Spatial autocorrelation models were examined in our study as well; however, the spatial parameters were never significant using weighting matrixes based on contiguity and per capita highway spending.
31. Gamkhar, "Role of Federal Budget."
32. Apportionments are based on the formula described in the highway authorization bill. The formulas vary based on the highway program (primary, secondary, urban, and interstate systems); however, the formulas include the following factors: Land area, urban and rural population, postal mileage, vehicle miles traveled, interstate lane mileage, and payments into the highway trust fund, among others.
33. Gamkhar, "Role of Federal Budget."
34. Gamkhar, "Response of State and Local Highway Spending."
35. Gamkhar, "Role of Federal Budget."
36. For more on the asymmetric responses to federal grant receipts, see Gamkhar and Oates.
37. Gamkhar, "Role of Federal Budget," and Gamkhar, "Response of State and Local Highway Spending."
38. Gamkhar, "Role of Federal Budget."
39. Knight, "Endogenous Federal Grants and Crowd-Out."
40. See Bradford and Oates.
41. Knight, "Endogenous Federal Grants and Crowd-Out."
42. James Buchanan, "The Economics of Earmarked Taxes," Journal of Political Economy 71 (1963): 457-467.
43. See also Walter McMahon and Case Sprenkle, "A Theory of Earmarking," National Tax Journal 23 (1970): 255-262.
44. Eklund suggests that the consumer demand analogy, although imperfect, cannot be ignored. The desirability of earmarking, it is argued, must be determined based on the trade-off between a better matching of taxpayers' preferences for public goods and the benefits of redistributive fiscal policies. See Per Eklund, "A Theory of Earmarking Appraised," National Tax Journal (1972): 223-227.
45. Charles Goetz, "Earmarked Taxes and Majority Rule Budgetary Processes," American Economic Review 58, no. 1 (1968): 128-136.
46. James Buchanan and Geoffrey Brennan, "Tax Instruments as Constraints on the Disposition of Public Revenues," Journal of Public Economics 9 (1978): 301-318.
47. Hsiung offers a complementary reason for adopting an earmarking arrangement, namely compartmentalization. Earmarking can prevent the problems of a particular budgetary item from spreading to other budgetary items. See Bingyuang Hsiung, "A Note on Earmarked Taxes," Public Finance Review 29, no. 3 (2001): 223-232.
48. Dieter Bos, "Earmarked Taxation: Welfare versus Political Support," Journal of Public Economics 75 (2000): 439-462.
49. Lee Dwight, "Overcoming Taxpayer Resistance by Taxing Choice and Earmarking Revenues," in Taxing Choice: The Predatory Politics of Fiscal Discrimination, ed. William F. Shughart II (New Brunswick, NJ: Transaction Publishers, 1997): 105-116.
50. Elizabeth Deran, "Earmarking and Expenditures, a Survey and a New Test," National Tax Journal (1965): 354-361.
51. Richard Dye and Therese McGuire, "The Effect of Earmarked Revenues on the Level and Composition of Expenditures," Public Finance Quarterly 20, no. 4 (1992): 543-556.
52. Gamkhar, "Role of Federal Budget" Gamkhar, "Response of State and Local Highway Spending" and Knight, "Endogenous Federal Grants and Crowd-Out."
53. States often receive a portion of the federal grant funds as each stage of a project is completed.
54. Gamkhar, "Role of Federal Budget."
55. Knight, "Endogenous Federal Grants and Crowd-Out."
56. A full-text version of the ISTEA is available at http://iti.acns.nwu.edu/ clear/infr/istea_lst.html.
57. Because states generally spend beyond the level required to reach the cap on federal funds, highway grants are treated as nonmatching. This practice is common in the literature.
58. Knight, "Endogenous Federal Grants and Crowd-Out."
59. Gamkhar, "Role of Federal Budget."
60. Given that we have only one endogenous independent variable, a whole model F-statistic on the first-stage regression was used to test for weakness of our instruments per William Greene, Econometric Analysis, 6th ed. (Upper Saddle River, NJ: Pearson Education, 2008): 350-353; Douglas Staiger and James. Stock, "Instrumental Variables Regression with Weak Instruments," Econometrica 65 (1997): 557-586; and James Stock and Mark Watson, Introduction to Econometrics, 2nd ed. (Boston: Pearson Education, 2007): Chapter 12, 439-441. The reported F-statistic of 81.15 is well in excess of the threshold (F-statistic of 10) needed to reject the hypothesis of weak instruments.
61. Gamkhar, "Role of Federal Budget," and Gamkhar, "Response of State and Local Highway Spending."