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Do State Fiscal Policies Affect State Economic Growth?

  • James Alm

    ()

    (Department of Economics, Tulane University)

  • Janet Rogers

    ()

    (Department of Planning Section, Nevada Department of Administration Division of Budget & Planning)

What factors influence state economic growth? This paper uses annual state (and local) data for the years 1947 to 1997 for the 48 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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File URL: http://econ.tulane.edu/RePEc/pdf/tul1107.pdf
File Function: First version, 2011
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Paper provided by Tulane University, Department of Economics in its series Working Papers with number 1107.

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Length: 49 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:tul:wpaper:1107
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  1. Barro, Robert J & Sala-i-Martin, Xavier, 1992. "Convergence," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 223-51, April.
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  16. Leamer, Edward E, 1985. "Sensitivity Analyses Would Help," American Economic Review, American Economic Association, vol. 75(3), pages 308-13, June.
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  18. Gernot Doppelhofer & Ronald I. Miller & Xavier Sala-i-Martin, 2000. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," NBER Working Papers 7750, National Bureau of Economic Research, Inc.
  19. Paul A. David, 2005. "Reforming the Taxation of Human Capital: A Modest Proposal for Promoting Economic Growth," HEW 0502002, EconWPA.
  20. Cletus C. Coughlin & Thomas B. Mandelbaum, 1989. "Have federal spending and taxation contributed to the divergence of state per capita incomes in the 1980s?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 29-42.
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