Quackenbush, Austin; Premkumar, Deepak; Artz, Georgeanne M.; Orazem, Peter

WP #11018, October 2011

The philosophy of fiscal federalism presumes that local communities will under- or over-provide public amenities in the presence of externalities.  We test this hypothesis using data from Vision Iowa, a state program which provided partial funding to communities to build tourist attractions.  We find a 1% increase in investment increased county taxable retail sales 0.9%.  The State’s return, from program-induced sales tax revenue, averaged 9.2% annually.  Local communities’ returns averaged 0.9% and we find a significant increase in surrounding areas’ sales.  This suggests that without state subsidies, communities would undersupply public amenities aimed at attracting visitors.

JEL Classification: H2, H4, H7

Keywords: fiscal federalism, local public goods, subsidy, externality, spillover, amenity, retail sales

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