State Budget Deficit Dynamics and the California Debacle

This paper analyzes the recent experience with state budget deficits in the United States, with an in-depth analysis of the California experience. Compared to prior recessions, states were slower to make adjustments in taxes and spending this time. The paper explores a variety of reasons for this di...

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Bibliographic Details
Published in:The Journal of economic perspectives 2004-04, Vol.18 (2), p.205-226
Main Author: Sheffrin, Steven M.
Format: Article
Language:English
Subjects:
Balanced budgets
Budget deficits
Capital gains
Economic recessions
Economic theory
Federal budget deficit
Government budgets
Governors
Personal income taxes
Recessions
State budgets
State government
States
Studies
Tax increases
Taxes
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Summary:This paper analyzes the recent experience with state budget deficits in the United States, with an in-depth analysis of the California experience. Compared to prior recessions, states were slower to make adjustments in taxes and spending this time. The paper explores a variety of reasons for this difference including changes in the legal, political, and institutional environments, the unusual increase in capital gains revenue during the boom preceding the recession, and the inherent difficulties in forecasting revenues, particularly those derived from capital income. As the case study from California illustrates, states made long term commitments from temporary revenue sources and were required to make budgetary decisions in the face of very incomplete information about current and projected tax receipts.
ISSN:0895-3309
1944-7965
DOI:10.1257/0895330041371330