Local Fiscal Responses to Procyclical Changes in State Aid

Phuong Nguyen-Hoang and Yilin Hou

Publius: The Journal of Federalism, 2014, vol. 44, issue 4, 587-608

Abstract: This article examines the asymmetry in local government responses to economic-cycle-based changes of state aid in a framework that distinguishes current outlay from noncurrent expenses and discretionary savings. Employing a panel dataset of Massachusetts municipalities for two economic cycles, we obtain three findings. First, we do not find evidence of property-tax relief during economic booms. Second, discretionary savings may be used to cover noncurrent outlays during booms and to offset spending cuts during recessions. Finally, we find a large (asymmetric) fiscal inducement that may emerge during recessions when state aid cuts coincide with property-tax shortfalls. While these context-specific results may not be easily generalizable, they necessitate further research into the role of local discretionary savings and cash reserves in intergovernmental fiscal relations.

Date: 2014
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