We hypothesize that the earmarks and dedications that come with some local option taxes restrict local governments in their operation, which causes loss in the efficient use of the sales tax revenue. That is, restrictions on the use of the tax dollars distort the behavior of local governments, leading to efficiency loss. Specifically we look at those taxes earmarked for transportation costs.
This paper uses national data at the county level from 1983 to 2004 data with controls and variables of interest such as: LOST rates, spending on highways and health, rural population, population density, and total revenue per capita. The analysis supports the above hypotheses.
The preliminary results suggest that, on average, an increase in the LOST rate, earmarked for transportation, changes spending on transportation expenditures. An 1% increase results in increased spending per capita of .01. We see this relationship with health spending as well; interestingly there is a notable difference between the two. The general (non-earmarked) LOST rate has a negative impact on health spending, but the opposite effect on transportation spending. There are many potential reasons for this difference. Most interestingly, transportation costs are being shifted to local governments more and more, this coupled with less reliance on user fees and gasoline taxes, more revenues have to be spent by local governments. This possibility will be tested as well.