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

  • James M. Poterba

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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File URL: http://www.nber.org/papers/w4375.pdf
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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: May 1993
Date of revision:
Publication status: published as Journal of Political Economy, 102 (August 1994), 799-821.
Handle: RePEc:nbr:nberwo:4375
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  1. Helen F. Ladd, 1993. "State responses to the TRA86 revenue windfalls: A new test of the flypaper effect," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 82-103.
  2. Edward M. Gramlich, 1991. "The 1991 State and Local Fiscal Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 249-288.
  3. Daniel R. Feenberg & William Gentry & David Gilroy & Harvey S. Rosen, 1988. "Testing the Rationality of State Revenue Forecasts," NBER Working Papers 2628, National Bureau of Economic Research, Inc.
  4. Douglas Holtz-Eakin & Harvey S. Rosen, 1989. "Municipal Construction Spending: An Empirical Examination," NBER Working Papers 2989, National Bureau of Economic Research, Inc.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. Harold W. Elder, 1992. "Exploring the Tax Revolt: an Analysis of the Effects of State Tax and Expenditure Limitation Laws," Public Finance Review, , vol. 20(1), pages 47-63, January.
  10. Alm, James & Evers, Mark, 1991. " The Item Veto and State Government Expenditures," Public Choice, Springer, vol. 68(1-3), pages 1-15, January.
  11. Sachs, Jeffrey & Alesina, Alberto, 1988. "Political Parties and the Business Cycle in the United States, 1948-1984," Scholarly Articles 4553026, Harvard University Department of Economics.
  12. Alesina, Alberto & Rosenthal, Howard, 1996. "A Theory of Divided Government," Econometrica, Econometric Society, vol. 64(6), pages 1311-41, November.
  13. 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.
  14. Ladd, Helen F., 1991. "Property tax revaluation and tax levy growth revisited," Journal of Urban Economics, Elsevier, vol. 30(1), pages 83-99, July.
  15. Rogers, D.L. & Rogers, J.H., 1993. "An Empirical Examination of State Government Budgets," Papers 3-93-5, Pennsylvania State - Department of Economics.
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