Association for Public Policy Analysis & Management

The 1972 Clean Water Act (CWA) constitutes one of the largest federal spending mandates in US history. The CWA presented a substantial cost shock to local governments by requiring large-scale improvements to wastewater infrastructure. Using a novel dataset on the universe of municipal wastewater treatment plants combined with detailed information on city finances from 1967-2007, I provide the first evidence of how the CWA regulations displaced funding of important local government services. In order to provide a causal estimate of the impact of the CWA spending mandate, I construct an instrumental variable that leverages the role of river networks in distributing pollutants across cities. Cities situated upstream of other large cities were more likely to be legally forced to adopt effective wastewater treatment technologies long before the CWA regulations came about in order to reduce pollution externalities downstream. These early adopter cities were not subject to the CWA infrastructure spending mandate when the law passed in 1972. Consequently, the upstream-downstream orientation of cities provides variation in treatment status that is plausibly exogenous to city budgetary and growth outcomes. My preliminary results suggest that municipal compliance with the CWA resulted in 20-25% less spending per capita on education as a result of 40-50% more spending per capita on wastewater treatment. Such displacement of locally-provided services resulted in significant and persistent population decline. This research can inform our understanding of the Clean Water Act - a significant but understudied environmental regulation - and more broadly, our understanding of how federal spending mandates impact local government finances and economic growth.