The Distributive Impact of Federal Fiscal Policy

Abstract

The authors analyze the intraregional distribution patterns of federal expenditures across Southern Californian cities, using Consolidated Federal Funds Reports data from fiscal years 1983 to 1996. The findings suggest that although poorer cities benefit from larger amounts of anti-poverty funds, they receive lower amounts of other types of expenditure. Thus, the allocation of federal funds fails to promote fiscal equalization across cities and actually contributes to urban disparities. Regression analyses reveal that a city’s poverty level and its proportion of minorities and immigrants have a negative impact on federal expenditure, but its fiscal capacity and institutional strength have a positive impact.

Fiscal Consequences of Concentrated Poverty in a Metropolitan Region

“…These positive effects imply that cities with greater resources (either from their own capacity or via IGR and direct federal spending) are able to spend more than other cities. This finding reinforces Joassart‐Marcelli and Musso's (2001) argument that cities benefiting from high levels of federal expenditures also spend higher amounts themselves because of matching grant requirements and other funding processes, including the ability to support grant‐writing staff, an increasingly important factor in winning intergovernmental funds offered on a competitive basis. To the extent that federal expenditures and IGR fail to equalize capacities (Joassart‐Marcelli and Musso 2001), this pattern is likely to reinforce the local socioeconomic divide.…”

“…Third, three‐year averages were computed to reduce large variations due to annual differences, and estimates were standardized to per capita figures to facilitate comparisons. Details of the estimation methodology are described in Joassart‐Marcelli and Musso (2001).…”

“…It is also interesting to note that local expenditures in the poorest third of cities increased at a much faster rate than did fiscal capacity (40 percent vs. 6 percent). This is likely to be in part a result of federal devolution that has given local government increasing responsibilities without equalizing fiscal disparities in local capacity (Joassart‐Marcelli and Musso 2001) and also because of ongoing income polarization—and, therefore, mounting social needs—in the region during the 1990s (Wolch et al 2005).…”

“…For instance, to the extent that federal expenditures address local needs and equalize fiscal capacity, we would expect these expenditures to be higher in places where local resources are limited and therefore negatively related with local expenditure. As Joassart‐Marcelli and Musso (2001) argue, however, the allocation of federal expenditure to cities does not reflect fiscal disparities and fails to equalize capacities. Under such conditions, federal expenditures are likely to be a complement to rather than a substitute for local expenditure and would have a positive impact on local spending.…”