The Effect of Earmarked Tax and Grant Revenue on Local Road Investment

Abstract

The financial system of road investment in Japan is quite complicated and not transparent. In particular, we have six kinds of earmarked taxes for road investment at the national and local levels. We also intergovernmental grants using a part of earmarked tax revenues at the national level. Thus we could predict that this financial structure possibly influences a local government decision making of road investment.
In this paper, we intend to analyze how the earmarked tax revenues and grants affect road investments of local governments. Taking the constraint of earmarked revenues in consideration, we apply the resource fungibility hypothesis for road investment and focus how earmarked revenues are recognized by local governments in their budget constraint. That is to say, we suppose the earmarked revenues are recognized as either a lump-sum type revenue or a categorical matching grant revenue.
Actually, using the prefecture government data, we tried regression analysis in order to investigate the effects of financial revenues on three categories of road investments. The results showed that a local government recognized earmarked taxes and also earmarked grants as if they were matching grants, and further those earmarked revenues have more stimulating effect to road investment than other general revenues.
Supposing excessive road investments in the public expenditure, we must consider how the public investment allocation should be and what should be the reason of earmarked taxes and grants for road investment.