"State Budgets and the Business Cycle: Implications for the Federal Balanced Budget Amendment Debate".

• Author: Blom, Barry
• Position: Brief Article

McGranahan, Leslie

Economic Perspectives, Third Quarter 1999, pp. 2-17.

This article examines the desirability of a federal balanced budget amendment by looking at the experience of states, 48 of which have balanced budget requirements. The author found that when unemployment increased by 1 percent, state revenues drop by $23 per capita. States minimize this loss in three ways: 1) they tend to rely on a-cyclical revenue sources such as charges, rents, fines, and state lotteries, 2) states increase tax rates, especially income tax rates, during economic downturns, and 3) during recessions, states receive more money from the federal government and pass on less money to local governments while cutting expenditures by roughly $9 per capita. These cuts are mostly accomplished by reducing spending on education and by drastically reducing spending on capital projects. The author also found that states issue both more short-term and long-term debt...