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The Effects of Fiscal Rules Based on Revenue Structure: Evidence from U.S State Governments

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  • Soyoung Park

    (Incheon National University)

  • Sungchan Kim

    (Catholic University of Korea)

Abstract

Subnational governments in the United States have explicit fiscal rules, such as tax and expenditure limitations (TELs). However, those governments have different requirements in terms of the stringency of the rules based on institutional conditions. Previous studies have exclusively examined the effectiveness of fiscal rules on fiscal condition, but not on the internal structures of government, including revenue structures. The impact of fiscal rules depends on a government’s revenue conditions, as well as the stringency of enforcement. Thus, this research will investigate revenue structures using revenue diversification, revenue elasticity, and revenue dependency. Employing a panel data set of U.S. state governments from 1997 to 2016, this study examines the influence of fiscal rules using TELs on deficit shocks and expenditure volatility. According to the results, this research suggests that fiscal rules can amplify deficit shocks while stabilizing state government expenditures, depending on the stringency of fiscal rules and the revenue structure. Overall, the results suggest that states with the strictest rules have less discretion in adjusting fiscal policy depending on business cycles. Even though strict rules also need more time to take effect in stabilizing volatility, states with the stricter fiscal rules should consider less diversified revenue or a less elastic revenue structure to stabilize their budgets.

Suggested Citation

  • Soyoung Park & Sungchan Kim, 2022. "The Effects of Fiscal Rules Based on Revenue Structure: Evidence from U.S State Governments," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 39(3), pages 763-781, October.
    • Handle: RePEc:spr:epolit:v:39:y:2022:i:3:d:10.1007_s40888-022-00274-8
    DOI: 10.1007/s40888-022-00274-8
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