Giver and Taker States Over the Business Cycle

Koray Caglayan () and Steven M. Sheffrin ()
Additional contact information
Koray Caglayan: American Institutes of Research
Steven M. Sheffrin: Tulane Economics and Murphy Institute

No 2001, Working Papers from Tulane University, Department of Economics

Abstract: Some states pay more in federal taxes than they receive in federal spending and have a negative balance of payments. While this uneven pattern of spending and taxation has been known for some time, little attention has been paid to the cyclical effects of these spending–tax differentials. Intuitively, “giver” states, those that pay more in taxes than they receive might have an extra cyclical buffer in the face of an economic downturn, as their balance of payments to the federal government may improve more than for “taker” states, those that receive more than they pay. In this study, we test the hypothesis of whether the giver status itself works as a potential stabilization mechanism during economic fluctuations. We use difference-in-differences methods to estimate the effect of giver status on the response of a state’s balance of payments during and after a recession. The Great Recession in 2008 serves as the exogenous shock in our identification strategy. To estimate the relationship between a state’s balance of payments and its gross domestic product growth, we take an instrumental variables approach. We use the variation in the response of federal fiscal measures to a recession that is attributable to giver status to estimate the effect of a state’s balance of payments on gross state product growth. The results from our difference-in-differences analysis indicate that after the 2008 recession, per capita balance of payments in giver states improved $808 more on average compared to taker states. The point estimates from our instrumental variable specification suggest that a thousand-dollar improvement in balance of payments increases the annual growth in gross domestic product by 2.2 percentage points. We also explore the milder 2001 recession. Although tax receipts of giver states fall more than taker states during the recession, spending also falls in these states relative to the taker states. The increase in defense and international spending after the 9/11 crisis most likely explains these results.

Keywords: Giver and taker states; Fiscal balances; Stabilization. (search for similar items in EconPapers)
JEL-codes: E62 H72 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-isf and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://repec.tulane.edu/RePEc/pdf/tul2001.pdf First Version, May 2020 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tul:wpaper:2001

Access Statistics for this paper

More papers in Working Papers from Tulane University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Kerui Geng ().