The Tax Spending Nexus: Evidence from a Panel of US State-Local Governments

Saeid Mahdavi and Joakim Westerlund
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Saeid Mahdavi: University of Texas at San Antonio

No 45, Working Papers from College of Business, University of Texas at San Antonio

Abstract: We re-examine the tax-spending nexus using, for the first time, a panel of fifty US state-local government units over the period 1963-97 and panel techniques that allow for cross-sectional dependence. 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 at the one percent level of significance. 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.

Keywords: tax-spend; state and local government; public finance; and panel cointegration. (search for similar items in EconPapers)
JEL-codes: C33 H21 H71 H72 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2008-05-20
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Related works:
Journal Article: The tax-spending nexus: Evidence from a panel of US state-local governments (2011)
Working Paper: The Tax-Spending Nexus: Evidence from a Panel of US State- Local Governments (2009)
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