Examining the fiscal implications of state balanced budget requirement systems
Smith, Daniel Lee
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As a formal policy and economic and political-cultural norm, the balanced budget requirement (BBR) has been a significant feature of state budgeting and finance since the early twentieth century. Previous quantitative studies of relationships between BBRs and various state financial and economic phenomena have appeared in the literatures of public administration, political science, and economics. However, prior empirical analyses have relied on subjective survey data onÑand have not incorporated comprehensive measures ofÑBBRs. The first major contribution made by this study is conceptual: putting to the test a framework of state BBR provisions that is more comprehensive, systematic, and informed than those previously employed in quantitative studies. The second is empirical; this study achieves a higher level of experimental control than any previous investigation by: 1) incorporating into the statistical models measures of the full range of balanced budget provisions found in the states; 2) utilizing more economic, political, and institutional controls; 3) measuring state-by-state variation over a long time series of 55 years (1950-2004); and 4) employing a stringent econometric estimator. Results indicate that state balanced budget requirement systems provisions governing all phases of the budgetary cycle have had substantive fiscal implications for all components of the budget over the years 1950-2004, including tax policy, spending behavior, and balance. In sum: 1) Requiring that a governor submit a balanced budget reduces per-capita tax effort in the states by $81.42 on average; 2) Requiring that own-source revenue match expenditures reduces state general expenditures by $2.462 billion on average; 3) Allowing the use of debt in balancing the budget reduces the proportion of revenue obtained through taxation but brings state general budgets closer to balance; 4) Placing a limit on the amount of debt that may be assumed for deficit reduction works in the opposite direction of the provision allowing for the use of debt; 5) Requiring state legislatures to pass balanced budgets brings total budgets closer to balance; and 6) Provisions not allowing deficits to carry-over impel states to constrain their budgets by reducing the proportion of total and general revenue obtained through taxation.