Fiscal Equalization Grant & Flypaper Effect Formula

Why $1 of unconditional federal grant stimulates 4x–10x more municipal spending than $1 of private voter income!

Under Wallace Oates’s Fiscal Federalism and Canada/OECD Representative Revenue Equalization, a municipality with per-capita fiscal base B_i below the national standard base B_std receives an unconditional Fiscal Capacity Equalization Grant G_i = t_std * MAX(0, B_std - B_i) at standard national effort rate t_std! Standard median-voter theory predicts $1 of unconditional lump-sum grant G_i should raise local public spending E_i by the exact same marginal propensity as $1 of private voter income Y_i (typically m_Y = 0.05 to 0.10, returning 90–95 cents via local rate cuts). Empirically, James Hines and Richard Thaler (1995) documented the Flypaper Effect ("money sticks where it hits"): municipal marginal propensity out of grants m_G (typically 0.40 to 0.80) vastly exceeds m_Y, generating Excess Flypaper Spending Wedge = (m_G - m_Y) * G_i per capita!

Verify on Local_PerCapita_Base B_i = 30,000 (B2), National_Standard_Base B_std = 42,000 (B3), Standard_Effort_Rate t_std = 0.05 (B4), Private_Income_MPC m_Y = 0.08 (B5), and Municipal_Grant_MPC m_G = 0.65 (B6): Per-Capita Equalization Grant is 0.05 * MAX(0, 42,000 - 30,000) = 600.00; Benchmark Voter-Equivalence Spending Lift would be 0.08 * 600 = 48.00; Actual Flypaper Spending Lift is 0.65 * 600 = 390.00; and Flypaper Excess Spending Wedge is (0.65 - 0.08) * 600 = 342.00 per resident (7.125x higher than frictionless median-voter pass-through)!

Representative Revenue System (RTS) Per-Capita Equalization Grant Formula

Asymmetric floor MAX(0, B_std - B_i) ensures rich jurisdictions above B_std receive 0 equalization transfer (unless a Robin Hood horizontal fraternal pool is enacted).

=IF(OR(B2 < 0, B3 <= 0, B4 <= 0, B4 >= 1), "Invalid Fiscal Input", ROUND(B4 * MAX(0, B3 - B2), 2))

Hines-Thaler Flypaper Excess Spending Wedge Formula

Validate marginal propensities 0 <= m_Y <= 1 and 0 <= m_G <= 1.

=LET(b_lc, B2, b_st, B3, t_st, B4, m_yn, B5, m_gr, B6, IF(OR(b_lc < 0, b_st <= 0, t_st <= 0, t_st >= 1, m_yn < 0, m_yn > 1, m_gr < 0, m_gr > 1), "Invalid Fiscal Input", LET(g_eq, t_st * MAX(0, b_st - b_lc), ROUND((m_gr - m_yn) * g_eq, 2))))

Further reading

• Arte Sheets Lesson — Tiebout Sorting & Median-Voter Local Public Spending
• Arte Sheets Lesson — Samuelson Public Good Sum-of-MRS & Lindahl Benefit Prices