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Giver and Taker States Over the Business Cycle

Author

Listed:
  • Koray Caglayan

    (American Institutes of Research)

  • Steven M. Sheffrin

    (Tulane Economics and Murphy Institute)

Abstract

Some states pay more in federal taxes than they receive in federal spending and have a negative balance of payments. While this uneven pattern of spending and taxation has been known for some time, little attention has been paid to the cyclical effects of these spending–tax differentials. Intuitively, “giver” states, those that pay more in taxes than they receive might have an extra cyclical buffer in the face of an economic downturn, as their balance of payments to the federal government may improve more than for “taker” states, those that receive more than they pay. In this study, we test the hypothesis of whether the giver status itself works as a potential stabilization mechanism during economic fluctuations. We use difference-in-differences methods to estimate the effect of giver status on the response of a state’s balance of payments during and after a recession. The Great Recession in 2008 serves as the exogenous shock in our identification strategy. To estimate the relationship between a state’s balance of payments and its gross domestic product growth, we take an instrumental variables approach. We use the variation in the response of federal fiscal measures to a recession that is attributable to giver status to estimate the effect of a state’s balance of payments on gross state product growth. The results from our difference-in-differences analysis indicate that after the 2008 recession, per capita balance of payments in giver states improved $808 more on average compared to taker states. The point estimates from our instrumental variable specification suggest that a thousand-dollar improvement in balance of payments increases the annual growth in gross domestic product by 2.2 percentage points. We also explore the milder 2001 recession. Although tax receipts of giver states fall more than taker states during the recession, spending also falls in these states relative to the taker states. The increase in defense and international spending after the 9/11 crisis most likely explains these results.

Suggested Citation

  • Koray Caglayan & Steven M. Sheffrin, 2020. "Giver and Taker States Over the Business Cycle," Working Papers 2001, Tulane University, Department of Economics.
    • Handle: RePEc:tul:wpaper:2001
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    References listed on IDEAS

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    More about this item

    Keywords

    Giver and taker states; Fiscal balances; Stabilization.;
    All these keywords.

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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