State Fiscal Policy during the Great Recession

Abstract

Plunging tax revenues and soaring social program demand during the Great Recession created state budget shortfalls of historic magnitude. After reviewing states’ aggregate reaction to the economic downturn, we conduct an original analysis of the recession’s budgetary impact on the states and their policy responses. Economic factors such as falling personal income and home values explain much of the variation in the recession’s impact. State budgeting rules and practices conditioned states’ experiences, but not always as intended: budget gaps were smaller in states with stricter balanced budget requirements, but larger in states with statutory spending limitations. Personal income tax increases were more likely in states with a Democratic legislature or greater public unionization rates, while midyear spending cuts were smaller in states with larger public sector unions. In sum, we find that while states’ objective economic situations determined the bulk of their responses to the Great Recession, political factors determined these responses’ shape and form.

For Richer or Poorer: The Politics of Redistribution in Bad Economic Times

“…Recessions constrain public policy both by reducing the revenue raised by taxation and by putting extra strain on the social safety net. States often respond by cutting spending and increasing taxes (Campbell and Sances 2013; Gordon 2011; McNichol, Oliff, and Johnson 2011; Oliff, Mai, and Palacios 2012)—a response that does not result in more or less redistribution but rather a change in the nature of policy redistribution. Yet, it is also possible for states to focus on one policy approach or the other—balancing the budget primarily by raising taxes on the wealthy or cutting benefits for the poor, which represents a change in policy and a significant shift in the amount of state-level policy redistribution.…”

“…Therefore, when facing budgetary pressure, we expect policy-motivated Democrats will propose tax increases while Republicans will push for spending cuts. This party polarization—reflecting different views about the appropriate policy response—was on display during the recent Great Recession at the national level (McCarty 2013), at the state level (Campbell and Sances 2013), as well as in public opinion. In fact, Brooks and Manza (2013) show how the small aggregate decrease in support for redistribution during the Great Recession was actually an asymmetrical divergence in which Democrats became more supportive of greater government response while Republicans moved further and faster in the other direction.…”

“…To better understand how economic contexts alter redistributive policymaking, we focus on one important aspect: the business cycle, particularly economic downturns. Policymakers seem to respond to recessions and other “bad economic times” by changing the balance of redistributive policy through reduced spending paired with tax increases (Campbell and Sances 2013; McNichol, Oliff, and Johnson 2011; Oliff, Mai, and Palacios 2012). We ask whether these policy responses reflected constrained policymaking in which economic downturns force policymakers to make policy choices that contradict their preferences or strategic policymaking in which policymakers capitalize on the economic context to maximize their existing policy priorities.…”

“…However, unlike the cross-national research which more commonly takes up these questions, the American states benefit from greater similarity across the jurisdictions of analysis, a shared national context, and available quantitative indicators of specific policy choices, rather than relying on policy outcomes to proxy enacted policy. Indeed, in their research on states’ response to the recent Great Recession, Campbell and Sances (2013) documented the impact of party control—not on the degree of fiscal crises states experienced—but on their policy approach adopted in response to this sudden downturn. We expect to find a similar pattern in this broader analysis of these political and policymaking dynamics.…”

Public Sector Unions and Privatization: Evidence From the Eldercare Sector in Danish Municipalities

“…In accordance with this view, Campbell and Sances (2013) find that American states with higher public union density were more likely to use tax increases rather than budget cuts when consolidating state finances in the wake of the 2008 financial crisis. Freeman and Han (2012) find tentative evidence that US states with higher public union density and more public sector collective bargaining have higher fiscal deficits and more public debt.…”