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

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. Copyright 1994 by University of Chicago Press.