The rise of the states: U.S. fiscal decentralization in the postwar period

One of the most dramatic changes in the fiscal federalism landscape during the postwar period has been the rapid growth in state budgets, which almost tripled as a share of GDP and doubled as a share of government spending between 1952 and 2006. We argue that the greater role of states cannot be easily explained by changes in Tiebout forces of fiscal competition, such as mobility and voting patterns, and are not accounted for by demographic or income trends. Rather, we demonstrate that much of the growth in state budgets has been driven by changes in intergovernmental interactions. Restricted federal grants to states have increased, and federal policy and legal constraints have also mandated or heavily incentivized state own-source spending, particularly in the areas of education, health and public welfare. These outside pressures moderate the forces of fiscal competition and must be taken into account when assessing the implications of observed revenue and spending patterns.

Research highlights
► State budgets almost tripled as a share of GDP and doubled as a share of public spending since WWII.
► This growth is not easily explained by changes in fiscal competition, income, or demographics.
► Federal policies have been drivers of state spending, notably in education, health and welfare.
► These outside pressures moderate the forces of fiscal competition.
► Intergovernmental interactions affect the implications of observed budget patterns.