Association for Public Policy Analysis & Management

This is the first national study of fiscal spillovers between local governments in the United States and the first to examine whether fiscal spillovers vary based on the form of democracy used to determine tax rates.  There is an extensive theoretical literature concerning fiscal spillovers between local governments, but it is challenging to empirically distinguish spillovers from common underlying trends.  Using a national panel of school-district level data, I employ a new instrumental variable strategy—a cross-border spatial lag model.  This model tests whether districts located near state borders respond to the predicted fiscal behavior of neighboring districts located in a different state.  Additional specifications focus on local spillovers in metropolitan areas and spillovers across relatively permeable state borders to reveal how the initial, conservative estimates of local spillovers may compare with in-state local spillovers.  The results reveal that districts follow their neighbors' lead for changes in school expenditures.  Districts also respond to changes in their neighbors' categorical expenditures: they respond quickly to changes in average class sizes and respond forcefully to changes in expenditures on teachers’ salaries.