Responses to Local Fiscal Shocks: Path Dependency Effects of the Clean Air Act

Abstract

Budgeting decisions in the context of local economic shocks reveal local fiscal priorities. This paper explores the relationship between economic shocks, expenditure path dependencies and local fiscal strategies in the context of federal environmental regulations under the Clean Air Act. Federal regulations applied to counties classified as not in attainment of ambient air quality standards affect local tax bases. Furthermore, these impacts are not immediate in nature, allowing local governments the time necessary to implement their most preferred fiscal response. This econometric analysis of counties throughout the entire U.S. spanning 20 years finds that current expenditure paths are more influential when making cuts than when expanding budgets. Local communities are also seen to employ some short-term use of reserve funds when facing negative expenditure pressures, but these funds are not used to completely prevent expenditure cuts. Furthermore, communities do not use debt as a mitigating response to external tax base pressures, but instead alter expenditure patterns.