The Dynamic Impacts of State Revenue Capacity on Highway Investment

Abstract

This study investigates the short-term effects of state-highway EARs (EARs) and federal-grant expenditure on present-year state revenue sources and highway investment, when another state-highway source, general revenue, is controlled for. In the dynamic framework, this article argues that general revenue interacts with highway EAR and federal-grant reimbursements since these revenue sources are substitutable. The results from the panel vector auto regression (PVAR) indicate that (a) EAR and federal grants are inversely related to general revenues used in highway programs, (b) when controlled for simultaneity, autocorrelation, and omitted-variable bias, EAR and federal grants are not significant for state-investment decisions, and (c) general revenue inversely relates to state investment because there is competition for public resources between highway and general-revenue programs.