Two tales of two U.S. states: Regional fiscal austerity and economic performance

Abstract

Abstract. The recent fiscal austerity experiments undertaken in the states of Kansas and Wisconsin have generated considerable policy interest. Using a variety of identification approaches within a difference-in-differences framework and examining a wide range of economic indicators, this paper assesses whether the experiments have spurred growth in the states as promised by the governors and legislatures which enacted them into law. The overall conclusion from the paper is that the fiscal experiments did not spur growth, and if anything, harmed state economic performance. Among the identification approaches used, the Synthetic Control Method (Abadie and Gardeazabal 2003;Abadie et al., 2010) is demonstrated to provide the most compelling evidence.

U.S. State and Local Fiscal Policy and Economic Activity: Do We Know More Now?

“…Only the positive effects across all three outcome variables from raising personal income taxes in California and the negative effects for employment and per capita GSP from cutting personal income taxes in Kansas could be considered statistically significant or close to statistical significance using the 1/ranking criterion for statistical significance in SCM (Abadie et al ., ). The results are mostly consistent with the case studies of Kansas and Wisconsin by Rickman and Wang (). 2.…”

“…Moretti and Wilson (2017) did not find any link between how well innovating firms were performing and later tax changes. Border county studies and other matching approaches often attempted to establish the absence of differences in preexisting trends prior to fiscal policy changes (e.g., Ljungqvist and Smolyansky, 2014;Rickman and Wang, 2018;Turner and Blagg, 2018).…”

“…Border county effects may not reflect the influence of state and local government expenditure differences between the states at the aggregate level. As noted by Rickman and Wang (2018), border counties for many states do not contain the major economic centers in the states. If the difference in state and local expenditures that accompany the difference in tax rates affects the major economic centers in a state differently than its border counties, recommendations that states should reduce taxes because of their effects at the border could be harmful to the overall state economy.…”

“…In direct response to heterogeneity found in the nationwide studies, Rickman and Wang (2018) used the synthetic control method (SCM) matching approach (Abadie and Gardeazabal, 2003;Abadie et al, 2010Abadie et al, , 2015 in case studies of Kansas and Wisconsin with the election of their governors in 2010. Kansas has been labeled as "one of the cleanest experiments for measuring the effects of tax cuts on economic growth in the U.S." (Gale, 2017).…”

“…We further investigate how much state and local fiscal policy effects may depend on particular circumstances by updating and expanding the SCM analysis of state and local fiscal policy by Rickman and Wang (2018). The SCM approach has been widely applied for policy analysis such as California's Tobacco Control Program by the developers of SCM (Abadie et al, 2010); McClelland and Gault (2017) discuss the SCM approach as a tool to understand state policy, including discussion of Abadie et al (2010) study and two other studies.…”