Revenue Bubbles and Structural Deficits: What's a State to Do?

47 Pages Posted: 4 Dec 2008 Last revised: 27 Jan 2014

See all articles by Rick Mattoon

Rick Mattoon

Federal Reserve Bank of Chicago

Leslie McGranahan

Federal Reserve Bank of Chicago

Date Written: April 25, 2012

Abstract

The past two recessions have both proved alarming to state government finances. In 2001, a relatively shallow national recession led to a severe downturn in state revenues that took three years to unwind. In the wake of the recent economic downturn, signs of fiscal stress are readily apparent. In this paper, we investigate whether the revenue patterns surrounding these two recessions are the result of state government revenues having grown more sensitive to economic conditions. We find that the responsiveness of revenues to measures of business cycle conditions has grown since the 1990s. We use data on state government revenues, state specific information on economic conditions, and measures of state policy to examine fiscal performance and budgeting practice over the economic cycle. Our findings suggest that increasing income cyclicality, in particular of capital gains, have made state revenues more responsive to the business cycle since the mid-1990s. We also find that changes in policy making have served to increase revenue cyclicality.

Keywords: business cycle, revenues, taxes, fiscal structure

JEL Classification: H70, H71, H72

Suggested Citation

Mattoon, Rick and McGranahan, Leslie, Revenue Bubbles and Structural Deficits: What's a State to Do? (April 25, 2012). FRB of Chicago Working Paper No. 2008-15. Available at SSRN: https://ssrn.com/abstract=1310789 or http://dx.doi.org/10.2139/ssrn.1310789

Rick Mattoon (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
United States
312-322-2428 (Phone)

Leslie McGranahan

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-5023 (Phone)
312-322-2357 (Fax)

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