Expenditures and receipts in state and local government finances: Comment

The aim of this note has been to show that Marlow and Manage's (1987) paper suffers from serious methodological problems due to the non-stationary data series used and the arbitrary lag lengths employed. Use of appropriate stationarity tests and optimal lag lengths of the variables change some of the basic conclusions of their paper. Contrary to their suggestion, the presence of a feedback between local tax receipts and expenditures imply that local governments should be concerned with the implication of their spending and revenue-enhancing decisions on their budget. Decisions to increase current expenditures may lead to higher future taxes. Similarly, efforts to impose higher taxes to reduce budget deficits at the local government level may be futile due to a subsequent increase in spending.     

Private sector shrinkage and the growth of industrialized economies: Reply

Further tests and thoughts on the OECD data lead me to conclude that, if anything, my 1986 paper underestimated the magnitude of the inverse relation between economic growth and government size. If one takes the nominal-based measure of government scale, as advised by Saunders, the significance levels, coefficient magnitudes and goodness of fits improve over what I found with my initial investigation. I would suggest that Saunders reconsider his reluctance to believe that the size of the public sector is unrelated to economic growth in OECD countries over this time period.One additional thought appears relevant to the current policy debate concerning budget deficits and economic performance within the major industrialized economies. The empirical work displayed here and in my 1986 paper suggests serious problems associated with the various proposals urging governments to raise taxes and/or ease fiscal policy. Elsewhere, I have suggested that available empirical evidence implies that plans to increase taxes as a way out of budget deficits are plans that carry the potential for raising government spending and possibly future deficits as well. Coupled with the evidence presented here, we should also recognize the potential of tax increases to raise the level of government participation in a country and, accordingly, exert inverse influences on its future economic performance as well. As suggested in my 1986 paper, the empirical evidence may suggest the following irony: While political participants may crave larger and larger non-market resource allocations, their future ability to satisfy that craving may very well be severely constrained by the satisfaction of that same appetite.     

Elections and the structure of taxation in developing countries

This article analyses the impact of the electoral calendar on the composition of tax revenue (direct versus indirect taxes). It thus represents an extension of traditional political budget-cycle analyses assessing the impact of elections on overall revenue. We appeal to the opportunistic political budget model of Drazen and Eslava (2010) to predict the relationship between taxation structure and elections. Panel data from 56 developing countries over the 1980–2006 period reveals a clear pattern of electorally-related policy interventions. Taking the potential endogeneity of election timing into account, we find robust evidence of lower indirect taxes being applied by incumbent governments in the period just prior to an election. Indirect tax revenue in election years is estimated to be 0.3 GDP percentage points lower than in other years, corresponding to a fall of about 3.4% of the average figure in the sample countries, while there is no such relationship with direct tax revenue.     

Crisis and Response: Treasury Cash Balance Crisis in Thailand 1980-1982

The author traces the treasury cash balance crisis in Thailand from 1980-1982 and finds that the crisis was a result of economic, political and technical factors. The world recession had a significant impact on revenues, as did the inability of the government to accurately project revenues. Politically, budget participants evaded prescribed procedures and resorted to emergency spending, which resulted in expenditures beyond budget planning. The Thai government resorted to borrowing, spending cuts, adjusting corporate tax payments and increasing taxes to cope with the crisis. The author calls for legal reforms to limit discretionary spending.     

The Benefit Equity Principle and Willingness to Pay for City Services

In 1991 and 1992, the City of Eugene, Oregon engaged in a citizen participation process to determine public support for a variety of spending and budget balancing alternatives. This process, called Eugene Decisions, employed an innovative combination of public forums, budget balancing exercises and representative surveys. Two of the surveys, which included questions about individual service use, are analyzed here in order to test whether the use of city services is related to willingness to pay taxes and fees. The concept of benefit equity is supported if service use is positively associated with willingness to pay.     

Wisconsin's Budget Deficit: Size, Causes, Remedies, and Consequences

Wisconsin's lawmakers increased spending and cut taxes during the 1990s. Then, in January of 2001, they faced an estimated $2.4 billion budget gap or deficit for the FY 2001–2003 biennium. They cut spending and generated additional revenue by borrowing against future tobacco settlement income. Still, by January of 2002, the estimated deficit had grown by an additional $1.3 billion, and more cutting and borrowing took place. Despite these actions, a $3.5 billion deficit was projected for FY 2003–2005. In this study, the causes of the deficit, the "remedies" selected, and their effects are examined. "Lessons" highlighted by Wisconsin's experience include the risks associated with nonincremental policy making, the high costs of excessive political partisanship, and the corrosive effects of "fiscal brinksmanship."     

Citizens and Resource Allocation: Improving Decision Making with Interactive Web-Based Citizen Participation

Collective consumption and benefit characterize many government services. Moreover, government services are mostly paid for collectively through taxes—there is little or no relationship between the taxes paid by a household and its use of a particular service. Public sector decision makers face complex budget problems with difficult solutions. Involving citizens meaningfully in these decisions has long been a conundrum. The authors teamed up with the town of West Hartford, Connecticut, to develop a Web-based survey to overcome some of these participation problems and help decision makers better understand citizen preferences. The Web survey allowed for real-time interactivity and was tailored to present respondents with trade-offs between service levels and taxes.     

A User's Guide to State Revenue Forecasting

One of the most difficult tasks in preparing a state budget is forecasting available revenues. An overly optimistic forecast may subsequently require unpopular budget cuts, tax increases, or both. A pessimistic forecast may trigger a political controversy over the size of the budget surplus, or may encourage additional spending that cannot be sustained in the future. Forecasters have always informally shared their experience with each other. Only in recent years, however have scholars begun to document those experiences.
A forecast user is an elected official, program manager, reporter or private citizen involved in the budget process who uses a forecast prepared by someone else as a basis for making or influencing policy decisions about state taxes and spending levels. __ While the objectives of these forecast users may vary depending on their role in the budget process, they all share one need in common: a sound forecast which provides them with the information they need to participate in the budget process. The first part of this article briefly reviews the status of revenue forecasting in the states. The second part reviews five specific forecasting issues. The third section, discusses limits of revenue forecasting. The concluding section is a summary and checklist of good revenue forecasting practices.     

The Distributional Politics of Fiscal Adjustment: A Case Study of Four Northeastern States

The federal Tax Reform Act of 1986 and an unexpected economic downturn soon thereafter resulted in a divergence between actual and anticipated revenues at the state level. To cope with the resulting budget deficits, states increased taxes, decreased expenditures, or both. This paper looks at the decisions made in four Northeastern States-New York, Connecticut, New Jersey, and Massachusetts.     

The Great Unraveling: Federal Budgeting, 1998–2006

Since 1998, budgeting reforms at the federal level have unraveled extensively. The budget process has become ad hoc, fragmented, and opaque, balance has been elusive, and the failure to prioritize has become endemic. One cause was the mismatch between the budget process in 1998, which was designed to eliminate deficits, and the emerging budgetary surpluses of that time. A second contributing factor was the desire to reduce taxes while expenditures were increasing as a result of wars and natural disasters. The consequences of this great unraveling include the failure to fund Medicare and Social Security adequately when the opportunity was presented, as well as threats to constitutional and democratic governance. Renewed reform may require greater transparency and a willingness to embarrass elected officials with iconic stories.     

Fiscal variables and growth: A cross-sectional analysis

This paper examines the impact of the key fiscal variables — taxes, expenditures, and deficits — on economic growth performance, using a reduced-form model and cross-sectional data for a sample of 76 developed and developing countries for the period 1972–81. Its simultaneous consideration of fiscal variables overturns the results of some existing studies. While taxes seem negatively associated with GDP growth, they are concommitant with a higher rate of growth when their benefits in terms of reducing deficits are taken into account. The positive association of government expenditures with GDP growth is rendered negative when their impact on deficits are factored in. Deficits are contractionary, and deficit-reducing tax increases and expenditure cuts are positively associated with growth. A balanced budget expansion of taxes and expenditures is negatively associated with growth. When separating the sample into low-, middle- and high-income countries, these results hold only for the second group indicating that the level of development influences the linkages between fiscal variables and GDP growth.The views expressed herein are those of the authors and should not be attributed to the World Bank or its affiliated organizations.     

Earmarking as a Strategy Against Budgetary Constraints: San Francisco's Children's Amendment

The passage and implementation of the San Francisco Children's Amendment, or Proposition J, in 1991 represents an important expansion of the increasingly common strategy of budgetary earmarking by human service organizations. The core of the initiative was a city charter amendment that earmarked a portion of existing property taxes and established a baseline budget for children's services. Of these provisions, the baseline budget has proven most important in preserving children's services and preventing any substitution effects in a time of increasing fiscal stress for the city/ county of San Francisco. This case also illustrates the role of a strong political appeal in passing technical budgetary initiatives over the objections of elected officials and others. While there was concern about the reduced flexibility created by earmarking a city's budget during a period of retrenchment, this concern was overlooked because of the overwhelming political support for the children's cause. However, conflict between groups was created by the measure as groups fought to be included in the provisions of the amendment and over whether each group had obtained its fair share of funding.     

Is There a “Singles Tax”? The Relative Income Tax Treatment of Single Households

The existence of a "marriage tax," in which many married couples pay more taxes when married than their combined taxes as single individuals, is well known. However, largely lost in the attention devoted to married taxpayers is the treatment of single taxpayers. This article examines the relative tax treatment of single and married taxpayers. Various types of representative taxpayers are constructed, and the difference in income taxes paid by single taxpayers and married taxpayers is calculated. These calculations show that there is a "singles tax"; that is, a single individual typically pays a greater income tax liability than a married couple with identical income, especially when the main transfer programs are considered.     

The Politics of Forecast Bias: Forecaster Effect and Other Effects in New York City Revenue Forecasting

This paper examines the impact of forecasters, horizons, revenue categories, and forecast timing in relation to decision making on forecast bias or accuracy. The significant findings are: for the most part forecasters tend to report forecasts that are similar rather than competitive. Forecast bias (underforecasting) increases over longer horizons; consequently claims of structural budget deficit are suspect, as an assertion of structural deficit requires that a reliable forecast of revenue shows continuous shortfall compared with a reliable forecast of expenditures. There is an overforecasting bias in property tax, possibly reflecting demand for services. There is an underforecasting forecast bias in two revenue categories, all other taxes and federal categorical grants, resulting in a net total underforecasting bias for the city's revenue. There appears to be a period effect (forecasts in June are substantially biased), but this effect requires further study. The study suggests further examination of the bias associated with revenue categories, time within the budget cycle, and forecast horizon.     

OMB and the Budget Examiner: Changes in the Reagan Era

This is the first of a two-part retrospective on the role of the OMB budget examiner during the Reagan administration. Changes in the federal budget process, historical federal deficits and the inability of Congress to meet appropriation deadlines have significantly altered the role of OMB and its budget examiners, undermining the examiner's traditional role as program analyst and controler. This part focuses on the preparation of the president's budget and budget execution, and the compressed time in which OMB must respond to "top-down" budget requirements. The summer of 1987 is presented as a case study of the demands now placed on OMB.
Part Two, in the next issue, will focus on the budget examiner in the congressional budget process and in advocacy roles for the president.     

Budget Rhetoric in Presidential Campaigns from 1952 to 2000

We offer a theory to identify the determinants of presidential campaign rhetoric related to the federal budget. The theory builds on the literature dealing with issue ownership, candidate strategy, retrospective voting, and voter preferences to generate eight hypotheses about the use of budget rhetoric. To test these hypotheses, over 800 campaign speeches from the major party presidential nominees from 1952 to 2000 are content analyzed. The content analysis generates measures of both the volume and tone of budget rhetoric. Volume is driven primarily by the objective balance of the budget and subjective importance given to it by voters and a conditional effect involving budget balance, incumbency, and partisanship. Tone is more complex, with positive rhetoric determined mostly by the budget balance and partisanship and overstated rhetoric shaped solely by the salience of the budget to the electorate. The article concludes with suggestions for future research.     

Fiscal Reaction to State Aid Uncertainties: Evidence from New York State

Late budgets have become increasingly present across the states and especially persistent in states such as New York and California. The combination of delayed states budgets and institutional constraints may trigger specific budgetary strategies. Uncertainty over state aid may lead school districts to over‐ or underestimate school budgets, which ultimately may have an effect on real property taxes and the amount of education consumed. Evidence from New York State school districts suggests that school districts react to uncertainty in the state budget through a combination of revenue, expenditure, and fund balance changes. The findings suggest that districts engage in “gaming” the institutional constraints, and tend to build up large fund balances as a response to perceived uncertainty.     

The President's Fiscal Year 1992 Budget: Almost Quiet on the Budgetary Front

The Fiscal Year 1992 Budget was prepared under unusual conditions. The Persian Gulf War, the piesident's disinterest in domestic issues, the bitter debate over the fiscal year 1991 budget, and the upcoming re-apportionment all combined to make this year atypical The result is a document in which the most substantial change is the cover—a patriotic red, white, and blue Inside, it uses the "one book" format of fiscal year 1991 The budget examines different interpretations of the budget deficit, implements major changes in budgetary accounting, and outlines assumptions made in preparing the budget. Overall, the budget document consolidates the gains made in 1990