ESTIMATING THE RESPONSIVENESS OF LOCAL TAX REVENUE TO INTERGOVERNMENTAL AID IN A SIMULTANEOUS EQUATION FRAMEWORK (NEW YORK)

With the enactment of General Revenue Sharing and the rapid expansion of social service programs in the late sixties and early seventies, local governments became increasingly dependent upon intergovernmental aid to finance their internal operations. Because of the magnitude of aid and because it often is conditional on local revenue effort, changes in own-source revenue receipts are closely related to changes in intergovernmental aid. However, previous tax elasticity studies have investigated the adequacy of own-source revenue mostly in terms of its responsiveness to economic growth and to changes in its revenue structure. These studies have ignored the influence of aid receipts. This dissertation extends the models of previous tax elasticity studies to test the responsiveness of own-source revenue to changes in aid receipts. The most basic question concerning the impact of aid is whether it is substituted for or whether it stimulates own-source financing. A theory of grants has evolved in the public finance literature which provides a general framework for analyzing the differences in own-source revenue response to various types of aid. Four types of aid variables are specified in a way that is consistent with the theory of grants. A two-stage least squares, multivariate regression procedure was used to estimate the revenue responsiveness model for 57 New York State county governments over the 1966-1977 period. The covariance (dummy variable) method of pooling time-series and cross-sectional data was used. The results were encouraging. The estimated elasticity coefficients for welfare aid and revenue sharing aid were almost always significant. Own-source revenue was positively responsive (stimulative) to matching, welfare aid and negatively responsive (substitutive) to non-matching, revenue-sharing grants. These results are consistent with the predictions of the theory of grants. Finally, both historical and ex ante simulations were performed. The historical simulations indicate that the average elasticity estimates were quite reasonable in predicting the past while the ex ante simulations indicate that county government revenues may be unacceptably high in the future if the trend of the most recent past continues