Using data from the contiguous US states from 1951 to 2008, this study examines the dynamics of the intertemporal budget constraint to better understand persistent budget deficits. The direction of causality between tax revenues and expenditures is of primary interest in answering the four hypotheses set forth in the literature: tax-spend, spend-tax, fiscal synchronization, and institutional separation. Overall, the results convey evidence in favor of the tax-spend hypothesis. The dynamics differ, however, in that states with relatively higher debt levels respond slower to fiscal imbalances and rely more on expanding debt levels. These results present a clear illustration of the fiscal adjustment mechanism and how states adapt under various institutional restraints.
ACIR (Advisory Commission on Intergovernmental Relations). 1987. Fiscal Discipline in the Federal System: Experience of the States. Washington, DC.
2.
BaghestaniHamidMcNownRobert. 1994. “Do Revenues or Expenditures Respond to Budgetary Disequilibria?”Southern Economic Journal61:311–22.
3.
BaileyStephenConnollyStephen. 1998. “The Flypaper Effect: Identifying Areas for Further Research.”Public Choice95:335–61.
4.
BarroRobert. 1979. “On the Determination of the Public Debt.”Journal of Political Economy87:940–71.
5.
BreitungJörg. 2001. “The Local Power of Some Unit Root Tests for Panel Data.” In Advances in Econometrics: Nonstationary Panels, Panel Cointegration, and Dynamic Panels, vol. 15, edited by BaltagiBadi H., 161–77. Bingley, UK: Emerald Group Publishing Limited.
6.
BreitungJörgDasSamarjit. 2005. “Panel Unit Root Tests Under Cross-sectional Dependence.”Statistica Neerlandica59:414–33.
7.
BuchananJames M.WagnerRichard E.. 1977. Democracy in Deficit: The Political Legacy of Lord Keynes. New York: Academic Press.
8.
BuettnerThiessWildasinDavid E.. 2006. “The Dynamics of Municipal Fiscal Adjustment.”Journal of Public Economics90:1115–32.
9.
CalderònCèsar, A.2002. “Real Exchange Rates in the Long and Short Run: A Panel Co-integration Approach.” Working Papers Central Bank of Chile 153, Central Bank of Chile.
10.
ChowdhuryAbdur, R.1988. “Expenditures and Receipts in State and Local Government Finances: Comment.”Public Choice59:277–85.
11.
ChowdhuryAbdur, R.2011. State Government Revenue and Expenditures: A Bootstrap Panel Analysis. Working Paper, Marquette University, Milwaukee, Wisconsin.
12.
CuñadoJuncal, Gil-AlanaLuis Alberikode GraciaFernando Pèrez. 2004. “Is the US Fiscal Deficit Sustainable?: A Fractionally Integrated Approach.”Journal of Economics and Business56:501–26.
13.
EngleRobert, F.GrangerClive W.. 1987. “Co-integration and Error Correction: Representation, Estimation and Testing.”Econometrica: Journal of the Econometric Society52:251–76.
14.
EwingBradley T.PayneJames E.ThompsonMark A.Al-ZoubiOmar M.. 2006. “Government Expenditures and Revenues: Evidence from Asymmetric Modeling.”Southern Economic Journal73:190–200.
15.
FriedmanMilton. 1978. “The Limitations of Tax Limitation.”Policy Review5:7–14.
16.
HadriKaddour. 2000. “Testing for Stationarity in Heterogeneous Panel Data.”Econometrics Journal3:148–61.
17.
HinesJr.JamesR.. 2010. “State Fiscal Policies and Transitory Income Fluctuations.”Brookings Papers on Economic Activity2:313–37.
18.
HooverKevin D.SheffrinSteven M.. 1992. “Causation, Spending, and Taxes: Sand in the Sandbox or Tax Collector for the Welfare State?”The American Economic Review82:225–48.
19.
KaoChihwaChiangMin-Hsien. 2000. “On the Estimation and Inference of a Cointegrated Regression in Panel Data.”Advances in Econometrics15:179–222.
20.
LevinAndrewLinChien-FuChuChia-Shang James. 2002. “Unit Root Tests in Panel Data: Asymptotic and Finite-sample Properties.”Journal of Econometrics108:1–24.
21.
MahdaviSaeidWesterlundJoakim. 2011. “Fiscal Stringency and Fiscal Sustainability: Panel Evidence from the American State and Local Governments.”Journal of Policy Modeling33:953–69.
22.
MarlowMichaelManageNeela. 1987. “Expenditures and Receipts: Testing for Causality in State and Local Government Finances.”Public Choice53:243–55.
23.
MarlowMichaelManageNeela. 1988. “Expenditures and Receipts in State and Local Government Finances: Reply.”Public Choice59:287–90.
24.
MartinGael M.2000. “US Deficit Sustainability: A New Approach Based on Multiple Endogenous Breaks.”Journal of Applied Econometrics15:83–105.
25.
McnicholElizabethOliffPhilJohnsonNicholas. 2011. “States Continue to Feel Recession’s Impact.” Technical Report. Washington, DC: Center on Budget and Policy Priorities.
26.
MeltzerAllan H.RichardScott F.. 1981. “A Rational Theory of the Size of Government.”The Journal of Political Economy89:914–27.
27.
MusgraveRichard A.1966. “Principles of Budget Determination.” In Public Finance: Selected Readings, edited by CameronH.HendersonW., 15–27. New York: Random House.
28.
PayneJames E.1998. “The Tax-spend Debate: Time Series Evidence from State Budgets.”Public Choice95:307–20.
29.
PayneJames E.2003. “A Survey of the International Empirical Evidence on the Tax-spend debate.”Public Finance Review31:302–24.
30.
PeacockAlan T.WisemanJack. 1979. “Approaches to the Analysis of Government Expenditure Growth.”Public Finance Review7:3–23.
31.
PedroniPeter. 1999. “Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors.”Oxford Bulletin of Economics and Statistics61:653–70.
32.
PedroniPeter. 2004. “Panel Cointegration: Asymptotic and Finite Sample Properties of Pooled Time Series Tests with an Application to the ppp Hypothesis.”Econometric Theory20:597–625.
33.
PesaranM. HashemSmithRon P.. 1995. “Estimating Long-run Relationships from Dynamic Heterogeneous Panels.”Journal of Econometrics68:79–113.
34.
PesaranM. HashemShinYongcheolSmithRon P.. 1999. “Pooled Mean Group Estimation of Dynamic Heterogeneous Panels.”Journal of the American Statistical Association94:621–34.
35.
Pettersson-LidbomPer. 2010. “Dynamic Commitment and the Soft Budget Constraint: An Empirical Test.”American Economic Journal: Economic Policy2:154–79.
36.
PoterbaJames M.1995. “Capital Budgets, Borrowing Rules, and State Capital Spending.”Journal of Public Economics56:165–87.
37.
QianYingyiRolandGèrard. 1998. “Federalism and the Soft Budget Constraint.”The American Economic Review88:1143–62.
38.
QuintosCarmela E.1995. “Sustainability of the Deficit Process with Structural Shifts.”Journal of Business & Economic Statistics13:409–17.
39.
RamRati. 1988. “Additional Evidence on Causality between Government Revenue and Government Expenditure.”Southern Economic Journal54:763–69.
40.
SkidmoreMark. 1999. “Tax and Expenditure Limitations and the Fiscal Relationships between State and Local Governments.”Public Choice99:77–102.
41.
SmithL. VanessaLeybourneStephenKimTae-HwanNewboldPaul. 2004. “More Powerful Panel Data Unit Root Tests with an Application to Mean Reversion in Real Exchange Rates.”Journal of Applied Econometrics19:147–70.
42.
WagnerRichard E.1976. “Revenue Structure, Fiscal Illusion, and Budgetary Choice.”Public Choice25:45–61.
43.
WesterlundJoakimMahdaviSaeidFirooziFathali. 2011. “The Tax-spending Nexus: Evidence from a Panel of US State-local Governments.”Economic Modeling28:885–90.
44.
WildasinDavid E.1997. “Externalities and Bailouts: Hard and Soft Budget Constraints in Intergovernmental Fiscal Relations.”World Bank Publications No. 1843, World Bank, Washignton, DC.
45.
WildasinDavid E.2010. “Intergovernmental Transfers to Local Governments.” In Municipal Revenue and Land Policies, edited by IngramGregory K.HongYu-Hung, 47–76. Cambridge, MA: Lincoln Institute of Land Policy.
46.
WildavskyAaron. 1988. The New Politics of the Budgetary Process. Glenview, IL: Scott, Foresman.
