Determinants of State and Local Capital Investment

The United States faces an infrastructure gap of nearly $3 trillion, with significant consequences for its economic competitiveness and public service provision. As state and local governments build and maintain the majority of the nation's infrastructure, understanding the factors that lead subnational governments to engage in capital spending is critical to supporting economic growth and standards of living. This paper explores a number of factors associated with state and local capital spending since 1977, including population demographics, federal stimulus, interest rates, political ideology, fiscal rules, and geography. In aggregate, spending has increased by 50 percent in real per-capita terms, though it has fallen as a share of total government spending. Federal assistance alone accounts for a large share of the variation in capital investment, while fiscal rules and political factors exhibit little explanatory power. These findings are consistent with a model in which capital investment is shaped primarily by cost pressures rather than economic returns or ideology.