North Carolina identified local sales tax leakage as a contributor to local inequity and created a revenue-sharing pool funded by local sales taxes, where revenues are earmarked for schools, economic development, and community colleges. This analysis tests the flypaper effect in a novel policy setting. We examine whether transfers supplement or supplant expenditures in earmarked areas or reduce fiscal effort. Overall, the evidence suggests a considerable flypaper effect, with revenues supplementing expenditures for public schools. We also find that the larger the transfer, the more likely that the revenue is used to increase spending on recipient programs.
Combs, A. E., & Afonso, W. B. (2025). Dollars, desks, and development: The impact of local sales tax revenue redistribution on recipient programs in North Carolina. National Tax Journal, 78(2), 295–326. https://doi.org/10.1086/733594
