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The Role of State Fiscal Policy in State Economic Growth

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  • Marc Tomljanovich
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    Abstract

    Do state policy makers have the ability to affect a state's rate of economic growth? This article examines one possible source of growth and per capita output level disparities by studying the role that state taxation and public expenditure decisions play in fostering economic development. Using pooled annual U.S. state-level data from 1972 to 1998, a fixed-effects model is employed to examine the effects of changing tax rates on both state per capita output levels and growth rates. The results indicate that higher tax rates negatively influence short-run state economic growth, which lowers state output levels. However, long-run growth is unaffected by changes in state tax rates, even after adjusting for the effects of initial per capita output levels, state expenditures, and aid from the federal government. Nor do changes in state public spending rates and federal aid permanently alter state growth rates, implying that state fiscal policies have only transitory effects on state growth. (JEL "H71", "O40", "R11") Copyright 2004 Western Economic Association International.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1093/cep/byh023
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    Bibliographic Info

    Article provided by Western Economic Association International in its journal Contemporary Economic Policy.

    Volume (Year): 22 (2004)
    Issue (Month): 3 (07)
    Pages: 318-330

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    Handle: RePEc:bla:coecpo:v:22:y:2004:i:3:p:318-330

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    Cited by:
    1. Ferede, Ergete & Dahlby, Bev, 2012. "The Impact Of Tax Cuts On Economic Growth: Evidence From The Canadian Provinces," National Tax Journal, National Tax Association, vol. 65(3), pages 563-94, September.
    2. Thomas A. Garrett & Russell M. Rhine, 2010. "Economic freedom and employment growth in U.S. states," Working Papers 2010-006, Federal Reserve Bank of St. Louis.
    3. W. Robert Reed, 2006. "The Robust Relationship Between Taxes and State Economic Growth," Working Papers in Economics 06/13, University of Canterbury, Department of Economics and Finance.
    4. António Afonso & Juan González Alegre, 2007. "Economic Growth and Budgetary Components: a Panel Assessment for the EU," Working Papers Department of Economics 2007/29, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.

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