| Understanding who benefits and who pays among income groups is critical when we analyze state and local governments' budget and fiscal policies. This dissertation explores two main research questions. First, how do intergovernmental transfers impact tax progressivity and redistributive spending? Second, do higher or lower income groups benefit disproportionately from the adoption of fiscal institutions?;The conventional fiscal federalism wisdom holds that it is the central government's responsibility to pursue redistributive policy due to spillover effects and labor mobility. In practice, state governments' tax systems tend to be regressive, although they do finance redistributive expenditure programs, including health, welfare and education. Surprisingly, there are very few empirical studies testing the impact of intergovernmental transfers on state and local governments' redistributive expenditure and tax progressivity simultaneously. This dissertation models three sub-national expenditure categories commonly considered to be redistributive: health and welfare, elementary and secondary education, and housing and community development. Using data covering 1977-2002, this research employs a three stage least squares (3SLS) regression model to allow for simultaneity in the relationships between intergovernmental transfers, tax progressivity, expenditure progressivity, and the poverty rate. Results show that the level of redistributive expenditures is significantly driven by funding of intergovernmental grants and there is a flypaper effect in spending on health and welfare. In addition, the impact of intergovernmental transfers on tax progressivity and redistributive expenditures increases during economic declines.;The second analysis builds on the first model to examine the impact of state and local governments' fiscal institutions on tax progressivity and redistributive spending. Results show that Tax and Expenditure Limits (TELs) significantly decrease tax progressivity and may also drive out high-income families who desire a higher level of public services. These two policy effects can be explicitly accounted for in the design, debate, and revision of TELs. |
