States in Fiscal Distress

35 Pages Posted: 21 Jun 2010 Last revised: 16 Jun 2021

See all articles by Robert P. Inman

Robert P. Inman

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: June 2010

Abstract

The 2007-2010 recession has imposed significant fiscal hardships on state and local governments. The result has been state deficits and the need to increase state taxes, cut spending, and withdraw funds from state rainy day accounts. The primary cause of state budget "gaps" has been the rise in the level of state unemployment. There is no evidence that gaps are related to state political institutions, the state's prior receipt of federal funding, or possibly favored access to key congressional budget committees. The federal government has responded to these gaps with the passage of the American Recovery and Reinvestment Act (ARRA) of 2009 intended to aid states in fiscal distress and to provide an economic stimulus. As insurance for fiscal distress, ARRA covers at most $.23 of each additional dollar of a state's budget gap; there is a large per capita payment that goes to all states, independent of the level of state deficits. As targeted assistance for stimulating local economies, ARRA funding is uncorrelated with state unemployment rates. ARRA funding appears to be decided by congressional politics, given the desire to pass a major spending and tax relief package as quickly as possible. States are important "agents" for federal macro-policy, but agents with their own needs and objectives.

Suggested Citation

Inman, Robert P., States in Fiscal Distress (June 2010). NBER Working Paper No. w16086, Available at SSRN: https://ssrn.com/abstract=1626576

Robert P. Inman (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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National Bureau of Economic Research (NBER)

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