Economics Working Papers

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Working Paper

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The current fiscal crises that most states in the United States are facing are generally the result of a severe macroeconomic downturn combined with a limited ability of the states to respond to such shocks. States are facing increased demand for public services at the same time revenue is falling. In this context, this paper explores the issue of temporal priority between government expenditures and revenue at the state and local levels. The results show that there is no uniform relationship between government revenue and spending across different states in the US. In fact, about 40% of the states show the absence of any temporal relationship between these two variables. This is quite revealing given the current state of the debate in the academic and policy-making circle. A support for the tax-spend hypothesis is found in 18% of the states while the spend-tax hypothesis is prevalent in another 16%. In 26% of the states, the revenue and expenditures decisions are jointly determined by the government.

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