Politics Can Limit Policy Opportunism in Fiscal Institutions: Evidence from Official General Fund Revenue Forecasts in the American States

Authors

  • George A. Krause,

  • David E. Lewis,

  • James W. Douglas


Abstract

Governments make policy decisions in the same areas in quite different institutions. Some assign policymaking responsibility to institutions designed to be insulated from myopic partisan and electoral pressures and others do not. In this study, we claim that differences in political context and institutional design constrain the policy choices governments make. Testable propositions based on an analysis of varying electoral incentives and time horizons created by these different contexts are empirically tested using panel data on official general fund revenue forecasts in the American states, 1987 to 2008. The empirical evidence reveals that executive branch agencies and independent commissions produce more conservative forecasts than legislatures with one important exception. Executive branch revenue forecasts in states with gubernatorial term limits are indistinguishable from legislative branch forecasts. Further, we find that legislative branch forecasts are more conservative in the presence of divided partisan legislatures than unified party government. In turn, this implies that entrusting policymaking authority to either the executive branch or an independent commission may only be consequential when the political system itself fails to check legislative excesses or executive myopia.

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