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Do State Fiscal Policies Affect State Economic Growth?

  • James Alm

    (Department of Economics, Andrew Young School of Policy Studies, Georgia State University)

  • Janet Rogers

    (Chief State Economist for the Department of Administration, Division of Budget and Planning, for the State of Nevada,

What factors influence state economic growth? This article uses annual state (and local) data for the years 1947 through 1997 for the forty-eight contiguous states to estimate the effects of a large number of factors, including taxation and expenditure policies, on state economic growth. A special feature of the empirical work is the use of orthogonal distance regression (ODR) to deal with the likely presence of measurement error in many of the variables. The results indicate that the correlation between state (and state and local) taxation policies is often statistically significant but also quite sensitive to the specific regressor set and time period; in contrast, the effects of expenditure policies are much more consistent. Of some interest, there is moderately strong evidence that a state’s political orientation has consistent and measurable effects on economic growth; perhaps, surprisingly, a more ‘‘conservative’’ political orientation is associated with lower rates of economic growth. Finally, correction for measurement error is essential in estimating the growth impacts of policies. Indeed, when measurement error is considered via ODR estimation, the estimation results do not support conditional convergence in state per capita income.

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Article provided by in its journal Public Finance Review.

Volume (Year): 39 (2011)
Issue (Month): 4 (July)
Pages: 483-526

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Handle: RePEc:sae:pubfin:v:39:y:2011:i:4:p:483-526
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