Rivers, lakes and revenue streams: The heterogeneous effects of Clean Water Act grants on local spending

Abstract

The Clean Water Act (CWA) funded $167 billion (2020$) in grants to municipal governments for wastewater treatment upgrades. We leverage variation in the timing of grant receipt with a difference-in-differences design to estimate the effect of CWA grants on local spending. On average, each dollar of grant revenue caused a $0.45 increase in sewerage capital spending. Dividing previously estimated benefit-to-cost ratios of CWA grants by this estimate suggests that each CWA grant dollar that municipalities spent on sewerage capital generated an average return of $1.01. In addition to funding grants, the Act set new capital standards for all wastewater treatment facilities in the United States. We show that CWA grants caused a dollar-for-dollar increase in sewerage capital spending up to the amount needed to cover the costs of capital upgrades newly mandated by the CWA, but after municipalities met these capital requirements, or if the capital mandate was not binding, they reduced their own spending on sewerage capital in response to grant receipt. Municipalities then redistributed grant money to local residents by reducing water bills.