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State Budget Deficit Dynamics and the California Debacle

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  • Steven M. Sheffrin

Abstract

This paper analyzes the recent experience with state budget deficits in the United States, with an in-depth analysis of the California experience. Compared to prior recessions, states were slower to make adjustments in taxes and spending this time. The paper explores a variety of reasons for this difference including changes in the legal, political, and institutional environments, the unusual increase in capital gains revenue during the boom preceding the recession, and the inherent difficulties in forecasting revenues, particularly those derived from capital income. As the case study from California illustrates, states made long term commitments from temporary revenue sources and were required to make budgetary decisions in the face of very incomplete information about current and projected tax receipts.

Suggested Citation

  • Steven M. Sheffrin, 2004. "State Budget Deficit Dynamics and the California Debacle," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 205-226, Spring.
    • Handle: RePEc:aea:jecper:v:18:y:2004:i:2:p:205-226
    Note: DOI: 10.1257/0895330041371330
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/0895330041371330
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    References listed on IDEAS

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    1. Timothy Besley & Anne Case, 2003. "Political Institutions and Policy Choices: Evidence from the United States," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 7-73, March.
    2. Severin Borenstein, 2002. "The Trouble With Electricity Markets: Understanding California's Restructuring Disaster," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 191-211, Winter.
    3. Petersen, John E., 2003. "Changing Red to Black: Deficit Closing Alchemy," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(3), pages 567-577, September.
    4. Alt, James E. & Lowry, Robert C., 1994. "Divided Government, Fiscal Institutions, and Budget Deficits: Evidence from the States," American Political Science Review, Cambridge University Press, vol. 88(4), pages 811-828, December.
    5. Bohn, Henning & Inman, Robert P., 1996. "Balanced-budget rules and public deficits: evidence from the U.S. states," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 13-76, December.
    6. Poterba, James M, 1994. "State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 799-821, August.
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    Cited by:

    1. Robert P. Inman, 2010. "States in Fiscal Distress," NBER Working Papers 16086, National Bureau of Economic Research, Inc.
    2. Douglas Noonan, 2007. "Fiscal pressures, institutional context, and constituents: a dynamic model of states’ arts agency appropriations," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 31(4), pages 293-310, December.
    3. Yolanda Kodrzycki, 2014. "Smoothing state tax revenues over the business cycle: gauging fiscal needs and opportunities," Working Papers 14-11, Federal Reserve Bank of Boston.
    4. Robert P. Inman, 2010. "States in fiscal distress," Regional Economic Development, Federal Reserve Bank of St. Louis, issue Oct, pages 65-80.

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