The Role of State Fiscal Policy in State Economic Growth

By Tomljanovich, Marc | Contemporary Economic Policy, July 2004 | Go to article overview

The Role of State Fiscal Policy in State Economic Growth


Tomljanovich, Marc, Contemporary Economic Policy


I. INTRODUCTION

As a result of the national economic slowdown since 2001, most U.S. states currently face severe budget shortfalls, and state legislators are considering myriad ways to alleviate the fiscal imbalances. The obvious solutions must involve either slashing state government spending or raising various state taxes. What needs to be carefully considered in these deliberations is that these fiscal contractions may have profound immediate and permanent consequences on economic growth. Also, the choice of policy may set the state on different short-run and long-run growth paths, thus policy makers would benefit from an analysis that examines the consequences of policy shifts on state economic growth.

Ascertaining determinants of long-run growth is of global as well as national interest, because analyzing reasons for economic growth within a country is a necessary prerequisite for tackling the problem of convergence in per capita incomes between different countries. Yet simply determining whether sustained economic growth is occurring within different areas of a country is a difficult task. Many economists, including Barro and Sala-i-Martin (1995) and Carlino and Mills (1993), have investigated if different regions of a country follow similar growth trajectories or in fact have their growth paths predominantly determined by initial conditions. The cases of Italy, with its consistently richer northern and poorer southern regions, and Canada, with its corresponding richer western and poorer maritime provinces, demonstrate that regional income convergence is not ensured for all countries, even developed ones. These cases also pose hard questions for policy makers, because these poorer regions have for decades been aided substantially by national governments in an effort to harmonize incomes across the countries, yet have not always achieved the desired goals.

Though there may be many possible reasons for disparate growth rates within a country, one conjecture involves differing state or regional tax rates. State fiscal policies may have profound effects on a state's economy. Papke (1991) examines the effects that state and local tax differentials have on business location decisions and finds that high state tax rates reduce the creation of new firms across most industries. As far as taxes comprising the bulk of a state's revenue base, higher income tax rates may also hinder economic growth by eroding incentives to work, save, and invest. Higher corporate taxes may cause either the migration of businesses to other states or an increase in the number of business failures. Higher sales tax rates may prompt purchases of goods and services in other states or through the Internet and mail-order catalogs, and higher property tax rates may keep households from purchasing (rather than renting) homes.

The theoretical literature on the relation between fiscal policy and economic growth is mixed. On the one hand, most economists agree that higher tax rates initially lead to lower levels of economic output, and thus lower transitional growth rates. However, there exist several different views about long-run growth effects, with some authors claiming that fiscal policies have no long-run growth effects, whereas others assert that higher tax rates lead to permanently reduced rates of growth. The latter view at first seems intuitive. States or regions with higher tax rates tend to drive away businesses and/or households, which ceteris paribus cause growth to suffer. However, on further reflection, an increase in tax rates may not always lead to diminished state or regional growth, nor are higher tax rates always unpopular. In 2002, voters in Massachusetts rejected a proposed ballot measure that would abolish the state's personal income tax. These voters agreed to pay higher taxes in exchange for improved public programs that included educational and environmental improvements. Thus if increasing state tax rates also causes public expenditures as a share of state income to increase, with a corresponding increase in tangible public spending that benefits households and/or businesses, then the possibility exists that a state's economy will experience at least short-run growth. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Role of State Fiscal Policy in State Economic Growth
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.