Does devolution crowd out development? A spatial analysis of US local government fiscal effort

Abstract

Devolution to the subnational state and local level has increased reliance on locally raised revenue to provide basic social, infrastructural, and economic development services. We conduct multilevel regression models of local government fiscal effort (locally raised revenue normalized by population and income) of all county areas in the continental United States for the period 2002–2007. Spatial regression and geographically weighted regression are used to understand differential spatial effects of subnational state policies on local fiscal effort across counties. In contrast to conventional fiscal federalism theory, which argues local government is the developmental state, we find increased spatial inequality as expenditures driven by local need may crowd out expenditures related to growth and development. Nonmetropolitan counties and older suburbs exhibit higher local effort, while suburban outlying areas have lower effort. State rescaling requires more attention to policies of the subnational state, particularly state aid and state centralization of fiscal responsibility to ensure that both redistributive and developmental expenditures can be maintained under devolution.