2007 Reports

Fiscal Spillovers between Local Governments: Keeping up with the Joneses' School District

Reback, Randall Lawrence

Although there is a large theoretical literature concerning tax and expenditure competition between local governments, there is relatively little empirical evidence concerning whether such competition actually occurs. In the context of U.S. public school districts, the fiscal behavior of one district could affect the revenue decisions of other, nearby districts. Using financial and geographic data for every school district in the U.S. from 1972 to 2002, this paper estimates the magnitude of fiscal spillovers between districts. The results confirm that districts' revenues are influenced by exogenous shocks in their neighbors' revenues, especially for districts that are already outspending their neighbors. A one dollar increase in the mean revenues per pupil of nearby districts leads to about a 20-cent increase in a district's own revenues per pupil. These results have important implications for the optimal design of school finance programs.