General revenue sharing and public sector unions

•I examine a general revenue sharing program implemented from 1972 to 1986.•I find evidence that indicates a strong flypaper effect in city governments.•I find that public sector unions skewed the use of grants towards increased wages rather than increased government services.•These findings could have implications for the size of the fiscal multipliers associated with intergovernmental transfers.

In this paper, I find that in the context of a large intergovernmental general revenue sharing program implemented from 1972 to 1986, cities increased expenditures one-for-one with federal grants, which is suggestive of a large flypaper effect. Furthermore, I find that cities in states with pro-union collective bargaining laws spent more than half of the transfers on increased wages, while cities in states without such laws spent a greater fraction on increased government services. These latter findings suggest that public sector unions play an important role in determining the usage and impact of intergovernmental grants.