The item veto and state government expenditures - Springer Link

Public Choice 68: 1-15, 1991. © 1991 Kluwer Academic Publishers. Printed in the Netherlands.

The item veto and state government expenditures

JAMES ALM Department o f Economics, Campus Box 256, University o f Colorado at Boulder, Boulder, CO 80309~0256

M A R K EVERS University o f Colorado at Boulder and Fort Lewis College

Submitted 8 March 1989; accepted 27 July 1989

1. Introduction Concern about the imbalance between revenues and expenditures has led governments at all levels in the United States to enact various methods of fiscal restraint, such as constitutional limits on spending or taxes, balanced budget requirements, and borrowing constraints. One method that has attracted increasing attention is the item veto. The item veto authority allows the chief executive to veto individual appropriation items in a budget bill without vetoing the entire bill itself. The item veto authority originated in the Confederate Constitution of 1861, and has now been extended to forty three of the fifty governors in the United States. a There has been substantial interest in extending the item veto power to the federal level, with eight different Presidents requesting the item veto authority. 2 It is often argued that the item veto has been at the state level - and would be at the federal level - an effective tool for reducing the level of expenditures caused by " p o r k barrel" legislation and by the legislator's propensity for "logrolling." It is also sometimes suggested that the item veto has given the governor the flexibility to change not only the level but the composition of state spending. However, evidence on the actual effectiveness of the item veto is quite limited. The purpose of this paper is to investigate these claims using data on the states' experiences with the item veto. Research on the item veto as a means of fiscal restraint has taken a variety of approaches. On a qualitative level, Ross and Schwengel (1982), Cronin and Weill (1985), and Wolfson (1987) argue the advantages and disadvantages of a presidential item veto on constitutional grounds, but provide no evidence on its actual impact. Some other studies have focused upon the use of the item veto as a mechanism of political partisanship rather than as a means of expenditure control. Abney and Lauth (1985) survey state budget officers, and find that the item veto is seldom used except in states where the political parties of the governor and the legislature differ. They argue that the item veto is primarily a means to attain alternative political objectives. Individual state studies by

Zimmerman (1981) for New York, Barnes (1986) for California, and Gosling (1986) for Wisconsin also find limited use of the item veto, with an insignificant fiscal impact. 3 On a more quantitative level, Zycher (1985) compares per capita expenditures in states with and without the veto authority, and finds no significant differences; however, he completely neglects other factors that may affect state expenditures. In the most complete work to date, Abrams and Dougan (1986) and Holtz-Eakin (1987) use multiple regression models to analyze the impact of the item veto on per capita state government spending, and find little evidence that the veto reduces state expenditures. However, Abrams and Dougan (1986) are primarily interested in the impact of various constitutional restraints on the level, not the composition, of state spending; they also do not include many factors that previous work has indicated affect state spending, and they do not consider the potential interaction between the use of the veto and the political parties of the governor and the legislature. Similarly, although HoltzEakin (1987) has a detailed specification of the political factors that may affect the impact of the item veto, he does not include such essential variables as the tax-price of government services in his demand for government services, and he does not examine the impact of the item veto on state spending by functional expenditure category.4 The work of Abrams and Dougan (1986) and HoltzEakin (1987) is clearly suggestive, but it seems useful to explore alternative specifications that model more completely both the economic and the political factors that affect the impact of the item veto on the level and the composition of state spending. This paper analyzes the item veto as a potential tool for fiscal restraint in a median voter model of state government expenditures. The demand for state government expenditures is modeled using the framework of Borcherding and Deacon (1972) and Bergstrom and Goodman (1973). The impact of the item veto on the level of total per capita state expenditures and on the composition of six functional categories of per capita state spending is then examined using data from all the states. The item veto is included in the demand equation in two ways: as a variable that indicates its presence or absence in a state, and as a variable that incorporates the interaction of the item veto and the potential partisan conflict between the governor and the controlling party in the legislature. The empirical results indicate that the impact of the item veto depends largely upon the political parties of the governor and the legistature, with the item veto more likely to have a negative impact on expenditures in those states in which the parties differ. In general, the impact on total expenditures is small and negative. More precisely, the item veto reduces total state spending by $.01 per $1.00 of per capita state spending. There is also some limited evidence that the item veto has a small impact on the composition of state spending, increas-

ing per capita expenditures in some functional categories but decreasing expenditures in other areas. Section 2 presents the theoretical and empirical median voter model of state government spending. Section 3 discusses the data and estimation methods. Empirical results are presented in Section 4, and summary and conclusions are in Section 5.

2. A model of state government expenditures The median voter framework demonstrates that, given a set of somewhat restrictive assumptions, the output of public goods chosen by a majority of voters will be the bundle of public goods preferred by the median voter. Borcherding and Deacon (1972) and Bergstrom and G o o d m a n (1973) use this framework to derive the demand for state and local government expenditures, and their approach is followed here. The general form of their demand equation is: E = /30 + /31.TAXPRICE + /32.INCOME + /33.POP + ~ q~iZi "4" U (1) where E TAXPRICE INCOME POP Zi

u ~i,~bi

= = = = = -=

In (per capita expenditures); In (median voter's marginal tax price per unit of output); In (median voter's income); In (state population); social and economic variables; random error term; parameters to be estimated.

Note that this equation can be used to estimate the demand either for total expenditures or for expenditures by functional category; both types of demands are estimated here. The derivation o f this equation is discussed in more detail in Borcherding and Deacon (1972). 5 The median voter's demand is likely to be a decreasing function of its own price, measured by the marginal tax price (TAXPRICE) of state government services. As discussed below, the price is affected by federal matching grants and by the wage of labor in the state. Similarly, if one assumes that the goods and services provided by state governments are normal goods, then the coefficient on INCOME should be positive. As shown by Borcherding and Deacon (1972), the coefficient on population (POP) can be Used to calculate the degree of publicness on government output. Some explanatory variables in Z i are similar across the median voter's de-

mand function for each expenditure category, while some depend upon the specific expenditure category. The common variables are suggested by other empirical work, and include the total land area of the state (AREA) and the percent of the population residing in urbanized areas (URBAN). The relationship between the demand for state government goods and services and these explanatory variables is somewhat tenuous. For example, including AREA is an attempt to capture the effects of population density on per capita expenditures. One might expect that some services provided by state governments (highways, for example) will be directly related to land area, while other services may not. Similarly, the degree of urbanization might be positively related to some state services (public welfare) and negatively related to others (administration) where economies of scale in production are realized. Also common to all demand equations is a measure of lumpsum federal aid for the specific functional category (GRANT). Grants-in-aid can be categorized as either lumpsum or matching grants. Bradford and Oates (1971) have shown that lumpsum grants to governments and to individuals should have equivalent effects on expenditures. A number of studies, however, have shown that lumpsum grants to state and local governments increase expenditures by more than equivalent increases in private (median voter) income, a result known as the flypaper effect.6 Fisher (1982) demonstrates that the flypaper effect exists if 0E/0z > h.0E/0y, where z is lumpsum grants, y is income, and h is the median voter's tax share. The estimation results allow examination of the flypaper effect. As for a matching grant at rate m, it reduces the marginal tax price of state government output to (l-m) per dollar of tax price. The tax price of the various expenditure categories fully reflects this feature. The inclusion of other social and economic variables in the demand equation depends upon the specific functional state expenditure category. These variables are based upon other studies that have estimated the demand for specific government services using a median voter approach. For example, Clotfelter (1977) finds a positive and significant relationship between the quantity of violent crime in a community and per capita expenditures for police; Frank (1985) finds a positive relationship between the number of persons below poverty and per capita expenditures for health and hospital services; and Craig and Inman (1982, 1986) show the impact upon education expenditures of education enrollment levels, and the impact of the number of AFDC recipients upon per capita expenditures for public welfare services. The exact specification varies for each expenditure category. Other specifications have been estimated with little impact on the results. Consider now the inclusion of the item veto authority in the expenditure demand equations. One rationale depends upon the recognition that individual legislators are responsive to the median voter of their individual district, while the governor is responsive to the median voter in the state. Because there is no

reason for the preferences of these median voters to be identical, the state median voter may want the governor to have the veto authority to offset the power of the district median voters. For example, in those states where proposed funding does not meet the expectations of the state median voter, preferences would be expressed by the governor vetoing that item of appropriation, implicitly signaling the legislature that an increase in funding would be preferred. Conversely, if proposed funding for a particular service exceeded the expectations of the median voter, the governor would veto that item of appropriation, signaling the legislature that either a decrease in funding or an elimination of that service would be appropriate. O f course, the usual expectation is that the presence of the item veto would have a negative effect on the demand for state government expenditures, since the item veto may reduce the likelihood of pork barrel legislation and logrolling. However, the analysis above suggests that the effect of the presence of the item veto by itself is indeterminate. 7 A second rationale for the item veto authority recognizes that the platform offered to the median voter of the state and those offered to the median voter of the various districts may differ because the political parties of the governor and members of the legislature (or the legislature as a whole) may differ; that is, the state median voter may prefer a governor who is more likely to use the item veto when the majority of the legislature is of a different party. The governor therefore uses the item veto to ensure that the agenda he or she was elected to represent is not altered significantly by a legislature offering a different political platform, and the median voter is thus concerned with how the item veto is used when the political parties of the governor and the legislature differ. Two terms are included to capture these two effects. The first is a dummy variable that captures the effect of the presence of the item veto itself (VETO). The second is the product of two dummy variables, and reflects the interaction between the item veto and differences in the political parties of the governor and the legislature (VETO*PARTY). The exact specification of these variables is discussed in the next section. The general form of the expenditure demand equations is therefore modified to: E = /30 + 131-TAXPRICE + /32.INCOME + fl3.POP + E thiZi + c~I.VETO + c~2.VETO*PARTY + u

(2)

where a 1 and Ot2 a r e parameters to be estimated and other definitions are the same as in equation (1). An important feature o f equation (2) is that it allows estimation of the item veto impact on both the level and composition of state spending.

6 Table 1. Variable definitions

Variable

Description

E TAXPRICE INCOME POP AREA URBAN GRANT OTHER ENROLL HIGHER ENROLL EDLEVEL POVERTY AFDC VEHICLE CRIME VETO VETO*PARTY

In (per capita expenditures)a In (median voter's marginal tax price per unit of output) b In (per capita state income) In (state population) In (state area in square miles) In (percent of state population in urban areas) In (per capita lumpsum grants) b In (state other education enrollments) In (state higher education enrollments) In (level of state education attainment) In (percent of state population in poverty) In (number of state AFDC recipients) In (per capita state motor vehicles) In (per capita state violent crimes) Dummy variable for the item veto Dummy variable for item veto and party interaction

a E represents total per capita expenditures, as well as per capita expenditures broken down by functional expenditure category (see Table 2). b The values of TAXPRICE and GRANT vary depending on the expenditure category of the dependent variable.

3. Data and estimation methods The median voter model o f equation (2) is estimated for all fifty states in the United States for the year 1982. D a t a are compiled for all relevant variables b o t h for total expenditures and for six functional expenditure categories: education, public welfare, health and hospitals, transportation, public safety, and administrative and other expenditures. Table 1 defines the variables, and Table 2 contains a m o r e detailed description o f the state.government services that are contained within each functional expenditure category. 8 Consider the independent variables. Unlike previous w o r k on the item veto, an i m p o r t a n t feature o f the specification here is the inclusion o f the tax price ( T A X P R I C E ) in the d e m a n d equations. The median voter's marginal tax price for each expenditure category is measured by the average public sector wage rate for full time equivalent employees in that category raised to the share o f labor in that category and multiplied by one less the relevant matching rate (see below) .9 Median voter income ( I N C O M E ) is proxied by mean 1982 personal income in each state; population ( P O P ) is each state's 1982 population; A R E A is the land area o f the state in square miles; and U R B A N is the percent o f total p o p u lation living in urbanized areas in 1982.

Table 2. Functional expenditure categories EDUCATION

Current expenditures for higher education, elementary, secondary, other (vocational) education, and libraries. PUBLIC WELFARE

Current expenditures for the administration of public welfare programs and social insurance programs. HEALTH AND HOSPITALS

Current expenditures for public health programs and state hospitals. TRANSPORTATION

Current expenditures for highways, air and water transportation, and terminals. PUBLIC SAFETY

Current expenditures for police protection, fire protection, and corrections. ADMINISTRATIVE AND OTHER

Current expenditures for general governmental administration, legislatures, judicial and legal, and other state government services, such as natural resources, parks and outdoor recreation, and public utilities. Source: U.S. Department of Commerce, Bureau of the Census (1983).

Data on intergovernmental grants-in-aid are generated from the U.S. Office of Management and Budget Catalog of Federal Domestic Assistance (1983). Each intergovernmental grant is placed into one of the state expenditure categories. Actual dollar amounts are determined from the Office of Management and Budget Budget Information for States (1983) and from the U.S. Bureau of the Census FederalExpenditures by State for 1982 (1983). These intergovernmental transfers are further subdivided into the broad classification of lumpsum or matching rate grants within each functional expenditure category. The matching rate in each functional expenditure category is determined by taking a weighted average of the matching rates based upon total dollar allocation in each grant program, and is then used to alter the tax price of that expenditure category. 10 Currently forty three of the fifty states empower the governor with some type of item veto authority. Some states authorize the governor to veto language as well as amounts, some states authorize the governor to substitute new amounts for the vetoed appropriation, and some states authorize the governor to reduce appropriations without vetoing the item itself. Table 3 contains a summary

8 Table 3. The item veto in the states State

Item veto

Reduce

Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia

YES YES YES YES YES YES YES YES YES YES YES YES YES NO YES YES YES YES NO YES YES YES YES YES YES YES YES NO NO YES YES YES NO YES YES YES YES YES NO YES YES YES YES YES NO YES

NO YES NO NO YES NO NO NO NO NO NO NO YES NO NO NO NO NO NO NO YES NO NO NO YES NO YES NO NO YES NO NO NO NO NO NO YES YES NO NO NO YES NO NO NO NO

Substitute YES NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO

Language

Override

NO NO NO NO YES YES NO NO NO NO NO NO NO NO NO NO YES YES NO NO YES NO NO NO NO NO NO NO NO YES YES YES NO NO YES NO NO YES NO YES NO NO NO NO NO NO

1/2 3/4 2/3 1/2 2/3 2/3 2/3 3/5 2/3 2/3 2/3 2/3 1/2 1/2 2/3 2/3 1/2 2/3 2/3 3/5 2/3 2/3 2/3 2/3 2/3 2/3 2/3 2/3 2/3 2/3 2/3 2/3 2/3 2/3 3/5 2/3 2/3 2/3 3/5 2/3 2/3 1/2 2/3 2/3 2/3 2/3

Table 3. Cont.

State

Item v e t o

Reduce

Substitute

Language

Override

Washington West Virginia Wisconsin Wyoming

YES YES YES YES

NO NO NO NO

NO NO NO NO

YES NO YES YES

2/3 2/3 2/3 2/3

Note. The item veto authority varies amongthe states. Only sevenstates have no item veto authori-

ty and are highlightedabove. Ten states grant a governorthe powerto reduceappropriations; fourteen states allow a governorto veto language as well as appropriations; only one state (Alabama) allows a governor to substitute a new item of appropriation for the vetoed item. Source: AdvisoryCommission on Intergovernmental Relations (1986). of the item veto authority in the fifty states. Based upon our earlier estimation results, no attempt was made to distinguish between types of item veto authority. 11 VETO assumes a value of one in those states in which the governor currently has the item veto authority, and a value of zero otherwise. The value of the dummy variable V E T O * P A R T Y depends upon differences in the political affiliation of the governor and the legislature. P A R T Y has a value of one if the political affiliation of the governor and the legislature differ, and has a value of zero otherwise; if only one of the bodies in the legislature differs in political affiliation, then a value of zero is also assigned. The interaction between the presence of the item veto and differences in political affiliation between the governor and the legislature is therefore captured by assigning a value of one to V E T O * P A R T Y if the governor of the state has the item veto authority a n d if the political party of the governor and the legislature differ; V E T O * P A R T Y has a value of zero otherwise. The total expenditure category is estimated by ordinary least squares methods, after correcting for heteroscedasticity using the Park-Glesjer test. The six functional categories of state government expenditures are estimated using the Zellner (1962) seemingly unrelated regression technique in order to capture mutual correlation among the error terms in the expenditure equations. This estimation technique also allows examination of the impact of the item veto on the composition of state government expenditures. ~2

4. Estimation results Estimates from the total expenditure equation are presented in Table 4. The estimate of the T A X P R I C E elasticity is negative and significant, and INCOME has a positive and significant impact. The remaining elasticities are

10 Table 4.

Estimation results: Level of expenditures

Independent variable TAXPRICE INCOME POP AREA URBAN GRANT VETO VETO*PARTY CONSTANT R2 F

Dependent variable: Per capita expenditures .805* (.131) .421" (.206) - .025 (.028) - .010 (.022) .231" (.088) .671* (.094) .077* (.044) - .08"7* (.029) - .278 (2.030) .79 24.05 -

-

(Standard errors in parentheses.) * Significance at the .05 level.

generally significant and consistent with results f r o m previous studies. Note that there is some evidence for the existence of the flypaper effect. Using the Fisher (1982) formula, the estimated effect of lumpsum aid is larger than the pure income effect. 13 It is the effect of the item veto that is of crucial interest. VETO by itself increases total state government expenditures by approximately $.08 per $1.00 of government expenditures. However, as argued earlier, the item veto authority will be more effective in representing the preferences of the median voter when the parties of the governor and legislature differ. As shown by V E T O * P A R T Y , per capita expenditures are reduced by nearly nine percent in those states with the item veto authority and different political parties between the governor and legislature. The net impact of the item veto therefore depends upon the political composition of the state. On average, the item veto reduces total per capita expenditures, but by only $.01 per dollar o f expenditure. Table 5 shows the estimation results for the six functional expenditure categories. The price elasticities are generally negative and significant. The in-

11 Table 5. Estimation results: Composition of expenditures

Dependent variable Independent variable

Education

TAXPRICE

- .562* (.129) INCOME .364 (.245) POP - .129" (.037) AREA .067* (.027) URBAN .029 (.179) GRANT .152* (.074) VETO - .008 (.086) VETO*PARTY - .030 (.059) OTHER ENROLL .008 (.018) H I G H E R E N R O L L .525* (. 106) EDLEVEL - .080 (1.951) POVERTY AFDC

Welfare

Health

-.505 - 1.459" (1.077) (.242) 1.652* 1.040* (.785) (.354) - .025 -.036 (.082) (.042) - .007 -.037 (.063) (.034) .041 .136 (.376) (.227) .757* .070* (.332) (.040) - .003 .166 (.191) (.117) - .128 - .045 (.118) (.076)

.098 (.368) .398* (.187)

Transportation - 1.060' (.385) 1.066* (.263) - .322* (.043) .155" (.032) - .683* (.199)

.348* (.097) - .127" (.067)

1.196"

-.321"

(.269) 1.655" (.422) -.207* (.059) .095* (.045) -.335 (.342)

(.097) 1.701" (.380) -.209* (.058) -.070* (.041) -.442 (.296) .427* (. 120) .194 (.140) -.030 (.096)

-.161

(.158) -.136 (.105)

- .296 (.213)

CRIME

R2 F

-

Other

.057 (.149)

VEHICLE

CONSTANT

Safety

4.379 (4.898) .60 7.20

- 10.172 (6.480) .36 3.51

-5.754 (3.344) .26 2.72

-7.203 (2.503) .71 15.96

.488* (.088) - 10.091 (4.230) .45 5.81

-

10.384 (3.639) .58 9.13

(Standard errors in parentheses.) * Significance at the .05 level.

come elasticities are positive in all cases and significant in all cases but one; comparing I N C O M E and G R A N T , there is generally less support for the flypaper effect than for total expenditures. The results for the remaining variables are similar to other studies. Table 5 also shows the impact of the item veto authority on the composition

12 of state government expenditures. Per capita expenditures in some functional service categories may be reduced to offset increases in per capita expenditures in other service categories. The results indicate that the presence of the item veto by itself (VETO) only has a significant effect on per capita expenditures for transportation. The presence of the item veto increases per capita transportation expenditures by over 41 percent compared to states without the item veto. Parameter estimates for the interaction term (VETO*PARTY) are all negative as expected, but only significant for per capita transportation expenditures. The presence of the item veto in states where the political parties of the governor and the legislature differ reduces average per capita transportation expenditures by $30; however, the net effect of the item veto is to increase per capita transportation expenditures by 24 percent. 14

5. Conclusions

The results in this paper suggest that the item veto has a small and negative impact on total state government spending in those states where the political parties of the governor and the legislature differ. The item veto also appears to have a small impact on the composition of state spending. These results provide some limited support for the conclusion that the item veto is used to reflect more accurately the preferences of the statewide median voter. Would the item veto be a useful tool in controlling the level of federal government expenditures? Extending the analysis to the federal level is tenuous at best. The most relevant comparison might be between total state expenditures and total budget outlays for the federal government. Applying the item veto's net reduction of $.01 per dollar of per capita total state spending to estimates of total federal outlays of roughly $1,150 billion for 1989 indicates that federal spending would be reduced by $12 billion annually. However, even this estimate may be too high. Some studies suggest that a presidential item veto would only apply to "discretionary" federal budget items, estimated at approximately 28% of total budget outlays. 15 If that were the case, then the state experience would suggest a reduction in federal budget outlays of only $3 billion. When compared with projected federal budget deficits of $100 billion, the item veto reductions seem insignificant. In short, evidence from the states suggests that the item veto reduces state spending, but only by a small amount. Extension of the item veto would likely reduce federal spending as well. However, the item veto does not appear to be any panacea for federal deficit reduction. Those seeking a "quick-fix" to perceived federal budget problems may want to explore other alternatives.

13 Notes 1. The U.S. House of Representatives, Committee on Rules (1986) provides a good historical development of the item veto. 2. See the U.S. House of Representatives, Committee on Rules (1986), which summarizes statutory and constitutional proposals for the item veto that have been submitted to Congress. 3. For example, Barnes (1986) reports that Ronald Reagan vetoed just $60 million of appropriations in his first two years as California governor, and did not use the item veto at all in 1971, the first year of his second term. 4. Holtz-Eakin (1987) does, however, look at the impact on current expenditures, capital expenditures, and grants-in-aid. He does not include a separate equation for total expenditures. 5. There are several assumptions necessary to derive equation (1). First, production of output in the states must be least-cost and must occur with identical, constant returns to scale CobbDouglas production functions. A necessary condition for the use of a Cobb-Douglas production function is the constancy over time of the labor share parameter. Using a procedure similar to an analysis of variance, data on both total expenditure and total payroll were collected for each of the fifty states in six functional state government expenditure categories for the period between 1979 and 1982. For each functional expenditure category, an equation was estimated to determine the labor share for each individual state. When these state labor shares were ordered according to total state expenditure, no systematic relation between the share of labor estimates and total state expenditure was noted. It therefore appears that any variation in the share of labor estimate is random, and the use of a Cobb-Douglas production function to explain the supply of state government services is appropriate. Further, to ensure that all state governments were using comparable production processes, labor share estimates for each of the states were compiled within plus or minus two standard errors of the mean state coefficient. Since estimates of the labor share coefficient for all states were contained within this interval, it is possible to estimate a single demand equation for all states for each of the expenditure categories with the median state's labor share coefficient a proxy for the labor share coefficient for all states in the demand equation. Second, the price of capital is assumed to be constant across all states. Third, taxes (and expenditures) are assumed to be nondiscriminatory, so the median voter pays an equal share of the cost of producing public output. Fourth, the amount of the public output (Q) consumed by the median voter is assumed to depend upon the divisibility of output among the state's population (POP). For a purely private good, the median voter consumes Q/POP; for a purely public good, he or she consumes Q. More generally, the median voter consumes Q/POP% where a is a parameter that measures the degree of publicness and is derived from the coefficient estimate on POP in equation (1). These and other assumptions are discussed in detail in Borcherding and Deacon (1972). 6. Courant et al. (1979) summarize studies that have examined flypaper effects. 7. Holtz-Eakin (1987) suggests a similar rationale for the item veto. 8. Variable means and standard deviations are available upon request. 9. Recall that the share of labor coefficient is determined by the ANOVA procedure decribed in note 5. Under the assumption that state government goods and services are produced through a Cobb-Douglas production function, labor share estimates were derived for each of the states. The labor share estimate for the median state was then determined for each expenditure category, and applied to the price term (TAXPRICE) in each equation. 10. Exact details of this process are available upon request. 11. Alternative specifications of VETO and inclusion of a separate term for political differences (PARTY) did not significantly alter the results. Holtz-Eakin (1987) also finds no difference in his results when attempting to capture the effects of differential item veto authority.

14 12. The six functional categories have also been estimated as single equations. The results are largely unaffected. 13. Evidence of the flypaper effect exists for both total expenditures and administrative and other expenditures. Using the Fisher (1982) formula, the estimated effect is $.43 per dollar of lumpsum aid for total state government expenditures and $.08 per dollar of lumpsum aid for administrative and other expenditures. These estimates are consistent with other studies. See Fisher (1982) for a summary of previous estimates. 14. A by-product of the estimation process is parameter estimates for the degree of publicness of the various state government services. These parameter estimates are: Service Total Education Public welfare Health and hospitals Transportation Public safety Administrative and other

Degree of publicness 0.971 0.824 0.989 1.037 1.050 1.132 0.746

(0.200) (0.300) (0.130) (0.212) (0.514) (0.382) (0.314)

(Standard errors are in parentheses.) These results are comparable to Borcherding and Deacon (1972). 15. See U.S. House of Representatives, Committee on the Budget (1984).

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