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November 2015 Policy Study, Number 15-9


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





A vast previous literature has examined the impact of federal grants on state and local spending. Much of this previous literature, however, focuses exclusively on the impact of the grant spending rather than on the state and local own-source revenues. This study departs from this literature by examining the impact of federal transfers on state and local taxes and charges. 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 results in higher own-source revenue and taxes. Importantly, our results suggest that the increases in federal grants to state and local governments associated with the ACA’s Medicaid expansion will have significant future tax implications at the state and local level as these governments raise revenue to continue these newly funded programs into the future and as federal support tapers off once the expansion is in place.


Federal transfers to states have grown from $74 billion a year in 1980 to almost $300 billion in 2012. Based on our results state revenues from taxes, charges, 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 other revenue sources, or an additional government burden of $158 per person.





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