Is the Response of State and Local Highway Spending Symmetric to Increases and Decreases in Federal Highway Grants?

Abstract

Do states and localities, when faced with cuts in federal highway grants, attempt to maintain spending on existing highway projects with own sources of funding? Current state and local government highway spending is postulated here to respond to federal highway grants of the current fiscal year and up to 2 previous fiscal years. The results of this study provide some evidence of asymmetry. When current federal highway grants are increased, their immediate effect on state and local government highway spending is negligible; their impact on spending comes in later years. In contrast, cutbacks in current federal highway grants result in a drop in current state and local government highway spending. The response of state and local government highway spending to lagged federal highway grants is statistically significant and symmetric with respect to increases and decreases in these grants.