The impact of federal and state grants on local government spending: A test of the fiscal illusion hypothesis

Philip Grossman

Monash Economics Working Papers from Monash University, Department of Economics

Abstract: This article offers an empirical test of the fiscal illusion hypothesis. It is argued that, if fiscal illusion increases with the degree of separation in taxing and spending powers, then federal unconditional grants ought to have a greater stimulatory impact on local government spending than state unconditional grants. Data for the 136 counties and cities of Virginia were examined and evidence in support of this hypothesis is provided. Federal grants were found to be the primary source of the stimulatory impact of grants. At the minimum, federal unconditional grants have twice the stimulatory effect as state unconditional grants.

Pages: 15 pages
Date: 1990
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Citations: View citations in EconPapers (30)

Published in Public Finance Review July 1990 vol. 18 no. 3 313-327

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Related works:
Journal Article: The Impact of Federal and State Grants on Local Government Spending: a Test of the Fiscal Illusion Hypothesis (1990)
Working Paper: The Impact of Federal and State Grants on Local Government Spending: A test of the fiscal illusion hypothesis (1988)
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