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The Role of State Fiscal Policy in State Economic Growth


  • Marc Tomljanovich

    1. Tomljanovich: Assistant Professor of Economics, 13 Oak Drive, Colgate University, Hamilton, NY 13346. Phone 1-315-228-7537, Fax 1-315-228-7033, E-mail
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      This is a revision of a paper presented at the Western Economic Association International 77th Annual Conference, Seattle July 1, 2002. The author is grateful to comments and suggestions made by David Bivin, Don Freeman, Matthew Rafferty, John Tatom, Jill Tiefenthaler and two anonymous referees. Any errors are, of course, my own.


Do state policy makers have the ability to affect a state's rate of economic growth? This article examines one possible source of growth and per capita output level disparities by studying the role that state taxation and public expenditure decisions play in fostering economic development. Using pooled annual U.S. state-level data from 1972 to 1998, a fixed-effects model is employed to examine the effects of changing tax rates on both state per capita output levels and growth rates. The results indicate that higher tax rates negatively influence short-run state economic growth, which lowers state output levels. However, long-run growth is unaffected by changes in state tax rates, even after adjusting for the effects of initial per capita output levels, state expenditures, and aid from the federal government. Nor do changes in state public spending rates and federal aid permanently alter state growth rates, implying that state fiscal policies have only transitory effects on state growth. (JEL H71, O40, R11)