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State Responses to Fiscal Crisis: The Effects of Budgetary Institutionsand Politics

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James M. Poterba

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Abstract

This paper explores how state fiscal institutions and political circumstances affect the dynamics of state taxes and spending during periods of fiscal stress. The analysis focuses on the late 1980s, when sharp economic downturns in several regions, coupled with increased expenditure demands, led to substantial state budget deficits. State fiscal institutions, such as "no deficit carryover" rules and tax and expenditure limitations, appear to have real effects on the speed and nature of fiscal adjustment to unexpected deficits. Political factors are also important. When a single party controls the state house and the governorship, the reaction to state deficits is much faster than when party control is divided. In gubernatorial election years, tax increases and spending cuts are both significantly smaller than at other times.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4375.

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Date of creation: Aug 1995
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Handle: RePEc:nbr:nberwo:4375

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Find related papers by JEL classification:
H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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  1. Ladd, Helen F., 1991. "Property tax revaluation and tax levy growth revisited," Journal of Urban Economics, Elsevier, vol. 30(1), pages 83-99, July. [Downloadable!] (restricted)
  2. Bloom, Howard S. & Ladd, Helen F., 1982. "Property tax revaluation and tax levy growth," Journal of Urban Economics, Elsevier, vol. 11(1), pages 73-84, January. [Downloadable!] (restricted)
  3. Bergstrom, Theodore C & Goodman, Robert P, 1973. "Private Demands for Public Goods," American Economic Review, American Economic Association, vol. 63(3), pages 280-96, June.
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  4. Daniel R. Feenberg & William Gentry & David Gilroy & Harvey S. Rosen, 1989. "Testing the Rationality of State Revenue Forecasts," NBER Working Papers 2628, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Carter, John R & Schap, David, 1990. "Line-Item Veto: Where Is Thy Sting?," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 103-18, Spring. [Downloadable!] (restricted)
  6. Borcherding, Thomas E & Deacon, Robert T, 1972. "The Demand for the Services of Non-Federal Governments," American Economic Review, American Economic Association, vol. 62(5), pages 891-901, December. [Downloadable!] (restricted)
  7. Alm, James & Evers, Mark, 1991. " The Item Veto and State Government Expenditures," Public Choice, Springer, vol. 68(1-3), pages 1-15, January.
  8. Rogers, D.L. & Rogers, J.H., 1993. "An Empirical Examination of State Government Budgets," Papers 3-93-5, Pennsylvania State - Department of Economics.
  9. Edward M. Gramlich, 1991. "The 1991 State and Local Fiscal Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1991-2), pages 249-288. [Downloadable!]
  10. Alesina, Alberto & Rosenthal, Howard, 1996. "A Theory of Divided Government," Econometrica, Econometric Society, vol. 64(6), pages 1311-41, November. [Downloadable!] (restricted)
  11. Nouriel Roubini & Jeffrey Sachs, 1988. "Political and Economic Determinants of Budget Deficits in the IndustrialDemocracies," NBER Working Papers 2682, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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