Fiscal Institutions in U.S. States

Abstract

This paper examines fiscal institutions in U.S. states, and their fiscal and economic consequences. The main institutions include traditional tax and expenditure limitations, balanced budget requirements, rainy day funds, supermajority rules for tax increases, gubernatorial line-item veto authority, and prohibitions on unfunded mandates. We discuss two important conceptual problems with empirical efforts to measure these institutions' consequences: (i) the endogeneity of the institutions, and (ii) their interactions with each other. In the context of new and recent empirical evidence, we describe econometric techniques to solve each problem separately, and the difficulties inherent in attempts to solve both simultaneously. 2