The Increasing Importance of Intergovernmental Transfer Revenue in Local Finance in Poland and the Flypaper Effect
DOI:
https://doi.org/10.52152/22.3.89-117(2024)Keywords:
local government, intergovernmental transfers, budgetary expenditures, flypaper effectAbstract
The article explores the growing trend of fiscal recentralization in Polish local finance, evident in the increase of intergovernmental transfers, leading to expanded budgetary expenditures, known as the "Flypaper Effect" (FPE). It aims to identify the causes and extent of the FPE in Polish municipalities and cities with county rights from 2010 to 2020, using descriptive and panel data analyses. Empirical research confirms the presence of the FPE in Polish local governments, more pronounced in rural municipalities than in urban counterparts and cities with county rights. The rise in public budgetary expenditures results from limited fiscal autonomy and the ongoing process of recentralization in public finance, further amplifying the FPE. The strength of the FPE varies depending on the specific types and characteristics of intergovernmental transfers. Additionally, the article highlights significant flaws in Poland's local funding legislation and its consequences, proposing potential paths for local finance reforms. In conclusion, it underscores the increasing trend of fiscal recentralization in Polish local finance driven by the FPE and emphasizes the pressing need for reforms to address these challenges.
References
Allers, M. A., & Vermeulen, W. (2016). Capitalization of equalizing grants and the flypaper effect. Regional Science and Urban Economics, 58, 115-129.
Aragon, F. M. (2013). Local spending, transfers and costly tax collection. National Tax Journal, 66(2), 343-370.
Aronson, J. R., & Munley, V. G. (1996). (Non)equivalence in a federalism: Dual tax shares, flypaper effects and Leviathan. Public Choice, 89, 53–62.
Bae, S. S., & Feiock, R. (2004). The flypaper effect revisited: intergovernmental grants and local governance. International Journal of Public Administration, 27(8-9), 577-596.
Bailey, S. J., & Connolly, S. (1998). The flypaper effect: Identifying areas for further research. Public Choice, 95, 335-361.
Baker, M., Payne, A. A., & Smart, M. (1999). An empirical study of matching grants: Thecap on CAP'. Journal of Public Economics, 72(2), 269-288.
Baltagi, B. H. (2005). Econometric analysis of panel data. Hoboken, NJ: Wiley.
Barnett, R. R., Levaggi, R., & Smith, P. (1991). Does the flypaper model stick? A test of the relative performance of the flypaper and conventional models of local government budgetary behaviour. Public Choice, 69(1), 1-18.
Bartkowski, J. (2019). Iluzje fiskalne. In W kręgu wyobrażeń zbiorowych. Polityka, władza, społeczeństwo (pp. 173-193). Łódź, Poland:Wydawnictwo Uniwersytetu Łódzkiego.
Becker, E. (1996). The illusion of fiscal illusion: Unsticking the flypaper effect. Public Choice, 86(1), 85-102.
Becker, G. S. (1983). A theory of competition among pressure groups for political influence. The Quarterly Journal of Economics, 98(3), 371-400.
Becker, J., Hopp, D., & Kriebel, M. (2020). Mental accounting of public funds–The flypaper effect in the lab. Journal of Economic Behavior & Organization, 176, 321-336.
Blöchliger, H. (2013). Measuring decentralisation: The OECD fiscal decentralisation database. In J. Kim, J. Lotz, & H. Blöchliger (Eds.), Measuring Fiscal Decentralisation. Concepts and Policies (pp. 15-35). doi:10.1787/9789264174849-en
Blöchliger, H., & Charbit, C. (2008). Fiscal equalisation. OECD Journal: Economic Studies, 2008(1), 1-22.
Blöchliger, H., & Petzold, O. (2009). Taxes or grants: What revenue source for sub-central governments?. OECD Economics Department Working Papers, (706), 1-39. doi: 10.1787/223111363085
Boadway, R. W., & Shah, A. (Eds.). (2007). Intergovernmental fiscal transfers: principles and practices. Washington, DC: World Bank Publications.
Brennan, G., & Pincus, J. J. (1996). A minimalist model of federal grants and flypaper effects. Journal of Public Economics, 61(2), 229-246.
Brollo, F., Nannicini, T., Perotti, R., & Tabellini, G. (2013). The political resource curse. American Economic Review, 103(5), 1759-1796.
Case, A. C., Hines, J. R., Rosen, H. S. (1993). Budget spillovers and fiscal policy interdependence: Evidence from the States. Journal of Public Economics, 52, 285-307.
Courant, P. N., Gramlich, E. M., & Rubinfeld, D. L. (1978). The stimulative effects of intergovernmental grants: Or why money sticks where it hits. Retrieved from https://www.researchgate.net/publication/248022084_The_Stimulative_Effects_of_Intergovernmental_Grants_Or_Why_Money_Sticks_Where_It_Hits
Dafflon, B., & Madiès, T. (2009). Decentralization: A few principles from the theory of fiscal federalism. Retrieved from https://www.semanticscholar.org/paper/Decentralization%3A-A-Few-Principles-from-the-Theory-Dafflon-Madi%C3%A8s/369a50ee808308428379dd3785280f21a8162892
Dahlby, B., & Ferede, E. (2016). The stimulative effects of intergovernmental grants and the marginal cost of public funds. International Tax and Public Finance, 23, 114-139.
Deller, S. C., & Maher, C. S. (2006). A model of asymmetries in the flypaper effect. Publius: the Journal of Federalism, 36(2), 213-229.
Dollery, B. E., & Worthington, A. C. (1996). The empirical analysis of fiscal illusion. Journal of Economic Surveys, 10(3), 261-297.
Filimon, R., Romer, T., & Rosenthal, H. (1982). Asymmetric information and agenda control: The bases of monopoly power in public spending. Journal of Public Economics, 17(1), 51-70.
Fisher, R. C. (1982). Income and grant effects on local expenditure: The flypaper effect and other difficulties. Journal of Urban Economics, 12, 324-345.
Gamkhar, S., & Oates, W. (1996). Asymmetries in the response to increases and decreases in intergovernmental grants: Some empirical findings. National Tax Journal, 49(4), 501-512.
Gramlich, E. M. (1969). State and local governments and their budget constraint. International Economic Review, 10(2), 163-182.
Gramlich, E. M., & Galper, H. (1973). State and local fiscal behavior and federal grant policy. Brookings Papers on Economic Activitie, 1, 15-58.
Greene, W. H. (2008). Econometric analysis. Hoboken, WI: Prentice Hall.
Grossman, P. J. (1990). The impact of federal and state grants on local government spending: A test of the fiscal illusion hypothesis. Public Finance Quarterly, 18(3), 313-327.
Grossman, P. J. (1994). A political theory of intergovernmental grants. Public Choice, 78(3), 295-303.
Guziejewska, B. (2009). Iluzje fiskalne w zdecentralizowanych systemach finansów publicznych. In L. Patrzałek (Ed.), Finanse lokalne (pp. 59-68). Poznań, Poland: Wybrane zagadnienia, .
Guziejewska, B., Majdzińska, A., & Żółtaszek, A. (2021). The flypaper effect and desirable legislative changes to local government financing systems. Lex Localis-Journal of Local Self-Government, 19(3), 587-608.
Hamilton, J. H. (1986). The flypaper effect and the deadweight loss from taxation. Journal of Urban Economics, 19(2), 148-155.
Henderson, J. M. (1968). Local government expenditures: A social welfare analysis. The Review of Economics of Statistics, 50(2), 156-163.
Heyndels, B. (2001). Asymmetries in the flypaper effect: Empirical evidence for the Flemish municipalities. Applied Economics, 33(10), 1329-1334.
Hines Jr, J. R., & Thaler, R. H. (1995). Anomalies: The flypaper effect. Journal of Economic Perspectives, 9(4), 217-226.
Hsiao, C. (2007). Panel data analysis—Advantages and challenges. Test, 16(1), 1-22.
Inman, R. P. (1979). The fiscal performance of local governments: An interpretive review. In P. Mieszkowski & M. Straszheim (Eds.), Current Issues in Urban Economics (pp. 270-321). Baltimore, MD: Johns Hopkins Press.
Inman, R. P. (2008). The flypaper effect (No. w14579). Retrieved from https://www.nber.org/system/files/working_papers/w14579/w14579.pdf
Iskandar, I. (2016). Flypaper effect at the local governments: An empirical analysis for Aceh Province. Economic Journal of Emerging Markets, 17(1), 24-32.
Jevons, W. S. (1879). The theory of political economy. New York, NY: Kelly.
Kańduła, S. (2017). Mechanizmy wyrównywania fiskalnego: Studium empiryczne gmin w Polsce w latach 2004-2014. Poznań, Poland: Wydawnictwo Uniwersytetu Ekonomicznego w Poznaniu.
Kuncoro, M. (2004). Teoria mikroekonomii. Jakarta, Indonesia: Erlangga.
Kusuma, H. (2017). Flypaper effect: Fiscal illusion and bureaucratic model. Jurnal Ekonomi dan Studi Pembangunan, 9(1), 28-40.
Kwiatkowski, K., Tyszkiewicz, W., & Wójcik, M. (2021). Raport finanse samorządów terytorialnych. Po pandemii. Od kryzysu do rozwoju. Warszawa, Poland: Fundacja Ośrodek Rozwoju Polski. Fundacja Przyjazny Kraj.
Lago, M. E., Lago-Peñas, S., & Martinez-Vazquez, J. (2024). On the effects of intergovernmental grants: A survey. International Tax and Public Finance, 1-53. doi: 10.1007/s10797-023-09816-7
Langer, S., & Korzhenevych, A. (2018). Equalization transfers and the pattern of municipal spending: An investigation of the flypaper effect in Germany (No. 01/18). Retrieved from https://www.econstor.eu/handle/10419/178424
Marshall, A. (1890). Principles of Economics. Rzeszow, PL: Prometheus Books.
McGuire, M. (2015). An econometric model of federal grants and local fiscal response. In Financing the new federalism (pp. 115-138). Abingdon, UK: Routledge.
Megdal, S. B. (1987). The flypaper effect revisited: An econometric explanation. The Review of Economics and Statistics, 69(2), 347-351.
Melo, L. (2002). The flypaper effect under different institutional contexts: The Colombian case. Public Choice, 111(3), 317-345.
Menger, C. (1871). Principles of Economics. Auburn, Alabama: Ludvic von Mises Institute.
Min, C. (2019). Models for panel data. In Applied Econometrics: A practical guide (pp.677-774). London, UK: Routledge.
Moffitt, R. A. (1984). The effects of grants-in-aid on state and local expenditures: The case of AFDC. Journal of Public Economics, 23(3), 279-305.
Mueller, D. C. (2009). Public choice III. New York, NY: Cambridge University Press.
Niskanen, W. (1971). Bureaucracy and representative government. Chicago, IL: Aldine-Atherton.
Oates, W. E. (1979). Lump-sum intergovernmental grants have price effects. In P. Mieszkowski, & W. H. Oakland (Eds.), Fiscal federalism and grants-in-aid (pp. 23-30). Washington, DC: Urban Institute.
Oates, W. E. (1999). An essay on fiscal federalism. Journal of Economic Literature, 37(3), 1120-1149.
Oates, W. E. (2005). Toward a second-generation theory of fiscal federalism. International Tax and Public Finance, 12, 349-373.
Pareto, V. (1971). Manual of Political Economy. New York, NY: Kelley.
Park, H. M. (2011). Practical guides to panel data modeling: A step-by-step analysis using stata. Public Management and Policy Analysis Program, Graduate School of International Relations, International University of Japan, 12, 1-52.
Pettersson, K. (2020). The flypaper effect: A study of the flypaper effect in Swedish municipalities (Master’s thesis, Umeå University, Umea, Sweden). Retrieved from https://www.diva-portal.org/smash/get/diva2:1464436/FULLTEXT01.pdf
Prior, M. (2019). Hooked: How politics captures people's interest. Cambridge, England: Cambridge University Press.
Quigley, J. M., & Smolensky, E. (1992). Conflicts among levels of government in a federal system. Public Finance, 47, 202-215.
Rios, V., Hortas-Rico, M., & Pascual, P. (2022). What shapes the flypaper effect? The role of the political environment in the budget process. Local Government Studies, 48(5), 793-820.
Rodden, J., Eskeland, G. S., & Litvack, J. I. (Eds.). (2003). Fiscal decentralization and the challenge of hard budget constraints. Cambridge, MA: MIT Press.
Sørensen, R. J. (1995). The demand for local government goods: The impact of parties, committees, and public sector politicians. European Journal of Political Research, 27(1), 119-141.
Stine, W. F. (1994). Is local government revenue response to federal aid symmetrical? Evidence from Pennsylvania county governments in an era of retrenchment. National Tax Journal, 47(4), 799-816.
Tanjung, A. H., Salam, S., Rusdi, J. F., Ermawati, Y., Novianty, I., Hendaris, R. B., & Apriliawati, Y. (2021). Flypaper effect assessment methods in the expansion of regional autonomy. MethodsX, 8, 101387.
Turnbull, G. K. (1992). Fiscal illusion, uncertainty, and the flypaper effect. Journal of Public Economics, 48(2), 207-223.
Turnbull, G. K. (1998). The overspending and flypaper effects of fiscal illusion: Theory and empirical evidence. Journal of Urban Economics, 44(1), 1-26.
Vegh, C. A., & Vuletin, G. (2015). Unsticking the flypaper effect in an uncertain world. Journal of Public Economics, 131, 142-155.
Wilde, J. A. (1968). The expenditure effects of grant-in-aid programs. National Tax Journal, 21(3), 340-348.
Worthington, A. C., & Dollery, B. E. (1999). Fiscal illusion and the Australian local government grants process: How sticky is the flypaper effect?. Public Choice, 99(1), 1-13.
Wyckoff, P. G. (1988). A bureaucratic theory of flypaper effects. Journal of Urban Economics, 23(1), 115-129.
Wyckoff, P. G. (1991). The elusive flypaper effect. Journal of Urban Economics, 30(3), 310-328.
Yu, Y., Wang, J., & Tian, X. (2016). Identifying the flypaper effect in the presence of spatial dependence: Evidence from education in China's counties. Growth and Change, 47(1), 93-110.
Yüksel, C. (2021). The flypaper effect: “reality” or “myth”? Evidence from Turkey. Sosyoekonomi, 29(49), 483-500.
Published
Issue
Section
License
Copyright (c) 2024 Lex localis - Journal of Local Self-Government
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
