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

37 Pages Posted: 24 Jul 2007

See all articles by James M. Poterba

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: May 1993

Abstract

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.

Suggested Citation

Poterba, James M., State Responses to Fiscal Crisis: the Effects of Budgetary Institutionsand Politics (May 1993). NBER Working Paper No. w4375. Available at SSRN: https://ssrn.com/abstract=484023

James M. Poterba (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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