Effects of Fiscal Stress on State Highway Infrastructure Finance: A Composite Index Approach

The American states have witnessed historical budget declines since the advent of the 2007 Great Recession. Facing worsening economic conditions and dramatically declining revenues, states have adopted various retrenchment strategies in response to this fiscal stress. On the expenditure side, megaprojects involving large capital outlays are likely to be postponed or reduced during periods of fiscal stress. Few empirical studies have investigated how the deteriorating fiscal conditions of state governments affect state capital finance. This paper attempts to address this gap by examining how fiscal stress affects state highway capital and maintenance spending. The empirical findings give support to the fiscal stress hypothesis that state highway finance is negatively affected by both current and lagged state fiscal stress.