Theories o scal federalism, such as those propounded by Musgrave, Tiebout, and Brennan and Buchanan, prescribe assignment of revenue sources among federal, state, and local governments. In this article, we demonstrate that the recent diversi cation of municipal revenue sources in response to devolutionary forces does not follow the expectations of the scal federalism theories. Our analysis suggests that the use of an institutional approach to the study o scal federalism would help to reduce the mismatch between theory and reality.