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The Impact of Federal and State Grants on Local Government Spending: A test of the fiscal illusion hypothesis

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  • P.J. Grossman

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.
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Suggested Citation

  • P.J. Grossman, 1988. "The Impact of Federal and State Grants on Local Government Spending: A test of the fiscal illusion hypothesis," Economics Discussion / Working Papers 88-07, The University of Western Australia, Department of Economics.
    • Handle: RePEc:uwa:wpaper:88-07
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    7. Martin McGuire, 1973. "Notes on Grants-in-Aid and Economic Interactions among Governments," Canadian Journal of Economics, Canadian Economics Association, vol. 6(2), pages 207-221, May.
    8. repec:bla:ecorec:v:64:y:1988:i:185:p:81-101 is not listed on IDEAS
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