Interstate Differences in Per Capita State and Local Revenues and The Neighboring State Effect

This paper examines cross-state differences in the responsiveness of per capita state and local revenues to changes in factors that determine these revenues. Our model proceeds from two intuitive points of departure. First, because of differing tastes and attitudes among the population toward public goods and services, states should respond differently to underlying determinants of per capita revenues. Second, though states differ generally from one another, groups or pockets of states may behave in a similar fashion because of what the literature has come to refer to as the neighboring state effect. Our data cover the period 1960 to 1992. The econometric results indicate that states differ in their response to changes in underlying revenue determinants. We also find, however, that some states exhibit a considerable degree of neighboring state behavior, particularly in the New England, West North Central, West South Central, and Mountain regions.