Abstract
<jats:p>This paper develops a general framework to construct optimal policy reforms allowing for fiscal spillovers onto other policymakers. The optimal reform direction depends on a single sufficient statistic for each policy, the welfare per internal cost (WPIC), which measures the welfare gain per dollar spent by the policymaker accounting for the welfare impacts of fiscal spillovers onto other policymakers. The WPIC collapses to the (welfare-weighted) marginal-value-of-public-funds if there are no fiscal spillovers and to the (welfare-weighted) net-social-benefit-per-dollar if behavioral costs accrue externally. We provide numerical examples illustrating that fiscal spillovers can meaningfully change the optimal reform direction.</jats:p>