State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics

TLDR

State taxes and spending in the late 1980s were shaped by regional downturns and rising expenditures, creating large budget deficits, and political factors also played a key role. States with restrictive fiscal institutions and unified party control adjust deficits more quickly, while gubernatorial election years see smaller tax hikes and spending cuts.

Abstract

This paper explores the dynamics of state taxes and spending during the late 1980s, when regional economic downturns and increased expenditure demands led to substantial state budget deficits. More restrictive state fiscal institutions, such as "no-deficit-carryover" rules and tax and expenditure limitations, are correlated with more rapid fiscal adjustment to unexpected deficits. Political factors are also important. When a single party controls the state house and the governorship, deficit adjustment 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.