We re-examine the tax-spending nexus using a panel of 50 US state–local government units between 1963 and 1997. We find that, unlike tax revenues, expenditures adjust to revert back to a long-term equilibrium relationship. The evidence on the short-term dynamics is also consistent with the tax-and-spend hypothesis. One implication of this finding is that the size of the government at the state–local level is not determined by expenditure demand, but rather by resource supply. This is consistent with the fact that many US state and local governments operate under constitutional or legislative limitations that seek to constrain deficits.
Field of Research
159999 Commerce, Management, Tourism and Services not elsewhere classified
Socio Economic Objective
970115 Expanding Knowledge in Commerce, Management, Tourism and Services