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The Role of State Fiscal Policy in State Economic Growth

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  • Marc Tomljanovich

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.

Suggested Citation

  • Marc Tomljanovich, 2004. "The Role of State Fiscal Policy in State Economic Growth," Contemporary Economic Policy, Western Economic Association International, vol. 22(3), pages 318-330, July.
  • Handle: RePEc:bla:coecpo:v:22:y:2004:i:3:p:318-330
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    References listed on IDEAS

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    Cited by:

    1. António Afonso & Juan Alegre, 2011. "Economic growth and budgetary components: a panel assessment for the EU," Empirical Economics, Springer, vol. 41(3), pages 703-723, December.
    2. Resul Cesur & Inas Rashad Kelly, 2014. "Who Pays The Bar Tab? Beer Consumption And Economic Growth In The United States," Economic Inquiry, Western Economic Association International, vol. 52(1), pages 477-494, January.
    3. Ferede, Ergete & Dahlby, Bev, 2012. "The Impact of Tax Cuts on Economic Growth: Evidence From the Canadian Provinces," National Tax Journal, National Tax Association;National Tax Journal, vol. 65(3), pages 563-594, September.
    4. Thomas A. Garrett & Russell M. Rhine, 2011. "Economic freedom and employment growth in U.S. states," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 1-18.
    5. Tweneboah Senzu, Emmanuel & Ndebugri, Haruna, 2018. "The economic evidence in the relationship between corporate tax and private investment in Ghana," MPRA Paper 84729, University Library of Munich, Germany.
    6. 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.
    7. repec:voj:journl:v:63:y:2016:i:5:p:541-562 is not listed on IDEAS
    8. Crosby, Andrew W. & Merriman, David F., 2016. "What Happened to Illinois’ Economy Following the January 2011 Tax Increases? A Midwestern Comparison," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 46(1).
    9. Yankow, Jeffrey J., 2014. "A Longitudinal Analysis of the Impact of State Economic Freedom on Individual Wages," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 44(1).
    10. Reed, W. Robert, 2008. "The Robust Relationship Between Taxes and U.S. State Income Growth," National Tax Journal, National Tax Association;National Tax Journal, vol. 61(1), pages 57-80, March.
    11. Motloja, Lehlohonolo & Makhoana, Tsholofelo & Kassoma, Rooyen & Houdman, Rozadian & Phiri, Andrew, 2016. "Changes in the optimal tax rate in South Africa prior and subsequent to the global recession period," MPRA Paper 74342, University Library of Munich, Germany.
    12. Zachary Horváth & Brian David Moore & Jonathan C. Rork, 2014. "Does Federal Aid to States Aid the States?," Growth and Change, Wiley Blackwell, vol. 45(2), pages 333-361, June.
    13. repec:liu:liucej:v:14:y:2017:i:2:p:265-301 is not listed on IDEAS
    14. repec:clp:wpaper:wp1 is not listed on IDEAS

    More about this item

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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