US State Fiscal Policy and Natural Resources

Abstract

An analytical framework predicts that, in response to an exogenous increase in resource-based government revenue, a benevolent government will partially substitute away from taxing income, increase spending and save. Fifty-one years of US-state level data are largely consistent with this theory. A baseline fixed effects model predicts that a $1.00 increase in resource revenue results in a $0.25 decrease in nonresource revenue, a $0.43 increase in spending and a $0.32 increase in savings. Instrumenting for resource revenue reveals that a positive revenue shock is largely saved and the rest is transferred back to residents in the form of lower nonresource tax rates. (JEL H71, H72, H76, Q38, R11)

Is There a Fiscal Resource Curse? Resource Rents, Fiscal Capacity and Political Institutions

“…Part of the literature has discussed this effect with respect to the short-term macroeconomic consequences for taxation, in terms of the amount and composition of tax revenues, as well as spending. James (2015) argues that a benevolent government decreases non-resource tax rates and increases spending and savings in response to higher resource revenues, providing US-state-level evidence: a $1 increase in resource revenues results in a $0.25 decrease in non-resource revenues, a $0.43 increase in government spending and a $0.32 increase in public savings. Morrison (2009) finds that an increase in non-tax revenues is associated with reduced taxation on elites in democracies, and more social spending in dictatorships.…”

Heterogeneous Vertical Tax Externalities, Capital Mobility, and the Fiscal Advantage of Natural Resources

“…Partial equalization is as well observed in various, developed and developing, federations (Martinez-Vazquez and Searle (2007)), and in the OECD(Blochliger and Charbit (2008)). 3James (2014) andRaveh (2013) provide evidence for the U.S.;Cai and Treisman (2005) do so for Russia, andYao and Zhang (2008) for China.…”

Is there a fiscal resource curse? Resource rents, fiscal capacity, and political institutions in developing economies

“…Part of the literature has studied this hypothesis with respect to the short-term macroeconomic consequences for taxation, in terms of amount and composition of tax revenues, and public finance management. James (2015) argues that, in response to higher resource revenues, governments decrease non-resource tax rates and increase spending and savings, providing US state-level evidence: a US$1 increase in resource revenues results in a US$0.25 decrease in nonresource revenues, a US$0.43 increase in government spending, and a US$0.32 increase in public savings. Arezki and Brückner (2012) show that resource revenue windfalls have a heterogeneous effect on sovereign bond spreads, reducing the spread in democracies, but increasing it in autocracies.…”