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Saving for a rainy day: Estimating the needed size of U.S. state budget stabilization funds

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  • Zhao, Bo

Abstract

Rainy day funds (RDFs) are potentially an important countercyclical tool for states to stabilize their budgets and the overall economy during economic downturns. However, how much each state needs to save in its RDF has become an increasingly important yet unresolved policy question. To address this issue, this paper develops some potential target RDF levels for each U.S. state, based on both the estimated short-term revenue component associated with business cycles and the extent of states’ preferences for stable tax rates and expenditure. The analysis shows that, in the last 25 years, at least 21 states never saved enough in their RDFs to offset revenue shortfalls from trend for each downturn period. The paper also provides policy recommendations on reforming the RDF caps.

Suggested Citation

  • Zhao, Bo, 2016. "Saving for a rainy day: Estimating the needed size of U.S. state budget stabilization funds," Regional Science and Urban Economics, Elsevier, vol. 61(C), pages 130-152.
    • Handle: RePEc:eee:regeco:v:61:y:2016:i:c:p:130-152
    DOI: 10.1016/j.regsciurbeco.2016.09.002
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    References listed on IDEAS

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    1. Knight, Brian & Levinson, Arik, 1999. "Rainy Day Funds and State Government Savings," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(3), pages 459-472, September.
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    Cited by:

    1. Wenchi Wei & Dwight V. Denison, 2019. "State Rainy Day Funds and Government General Fund Expenditures: Revisiting the Stabilization Effect," Public Finance Review, , vol. 47(3), pages 465-492, May.
    2. Christian Buerger & Vincent Reitano & Ciana Sorrentino, 2022. "State fiscal reserves: Supplementation and substitution over economic boom and bust years," Public Budgeting & Finance, Wiley Blackwell, vol. 42(1), pages 98-118, March.
    3. Etienne Farvaque & Hira Iqbal & Nicolas Ooghe, 2020. "Health politics? Determinants of US states’ reactions to COVID-19," Post-Print hal-03128875, HAL.
    4. Kawika Pierson & Jon C. Thompson & Fred Thompson, 2024. "Do what we did last year, but do not stray too far from the pack: A behavioral public finance approach to municipal cash reserves," Journal of Regional Science, Wiley Blackwell, vol. 64(3), pages 786-803, June.
    5. repec:aei:rpaper:1008570714 is not listed on IDEAS
    6. Bo Zhao, 2019. "Consequences of state disinvestment in public higher education: lessons for the New England states," New England Public Policy Center Research Report 19-1, Federal Reserve Bank of Boston.

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    More about this item

    Keywords

    E32; E63; H71; H72; Rainy day funds; Budget stabilization funds; Revenue cyclicality;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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