The political affiliation effect on state credit risk

Past research largely has ignored the effects of political parties on states’ default risks. This paper addresses that question by analyzing the response of credit spreads to weekly polling data from 17 gubernatorial elections between 2009 and 2012, during the 6 months prior to Election Day. The findings are that political affiliation has a significant effect on states’ default risks. The estimated effect of electing a Republican governor is a 6% reduction in the credit spread of the state. The effect prevails regardless of the party in control of the state legislature, and it is larger when gubernatorial elections are contested closely. Set in the context of case law, the paper links higher tax levels to greater credit risk. Moreover, an analysis of the candidates’ campaign promises suggests that stronger positions against tax increases are associated with less default risks. The results of the paper are therefore consistent with the empirical evidence suggesting that Republicans prefer lower taxes.     

Budget Deficits in the States: Connecticut

Like many states, the State of Connecticut has recently faced substantial budget problems. This article is one of several that explore budget deficits in the states. We explore the reasons, extent, and current solutions to the budget deficits in Connecticut. Connecticut's fiscal circumstances include very poor accounting practices; dueling revenue estimates; large amounts of debt (both bonded and for post-employment benefits); a structurally strong legislature and governor; a governor and legislative majority of different political parties and fiscal philosophies; and a legislature with the ability to override gubernatorial vetoes. The combination of these ingredients has led to a highly partisan and contentious approach to budget discussions amid some of the largest budget deficits the state has ever experienced.     

Politics Can Limit Policy Opportunism in Fiscal Institutions: Evidence from Official General Fund Revenue Forecasts in the American States

Governments make policy decisions in the same areas in quite different institutions. Some assign policymaking responsibility to institutions designed to be insulated from myopic partisan and electoral pressures and others do not. In this study, we claim that differences in political context and institutional design constrain the policy choices governments make. Testable propositions based on an analysis of varying electoral incentives and time horizons created by these different contexts are empirically tested using panel data on official general fund revenue forecasts in the American states, 1987 to 2008. The empirical evidence reveals that executive branch agencies and independent commissions produce more conservative forecasts than legislatures with one important exception. Executive branch revenue forecasts in states with gubernatorial term limits are indistinguishable from legislative branch forecasts. Further, we find that legislative branch forecasts are more conservative in the presence of divided partisan legislatures than unified party government. In turn, this implies that entrusting policymaking authority to either the executive branch or an independent commission may only be consequential when the political system itself fails to check legislative excesses or executive myopia.     

Local government grants and income tax revenue: Redistributive politics in Norway 1900–1990

An important aspect of the welfare state is public provision of private goods, primarily education and health care. In Norway the provision of these services has been organized through the local public sector. The development of the welfare state has to a large extent been the development of welfare communes. The important revenue sources of the local and county governments, grants and income tax revenue, have been controlled nationally, and the paper addresses the determinants of these revenues during 1900–1990. The approach combines a demand model of local public services emphasizing price and income-elasticities with a political economy model of central government ideology and strength. The decision making is understood as bargaining between the government and interest groups, and the political structure consequently is of importance for the policy outcome. The analysis shows how politics matter, and the results indicate that a minority coalition government implies 30% more grant and income tax revenue to local and county governments than one party majority in the long run.     

Cities,Tax Revenues,and a State's Fiscal Future: The Value of Major Urban Centers

Competition among core cities or urban centers and suburban and rural areas besets numerous states. The competition often occurs amid a political environment in which suburban and rural areas enjoy a political majority in the state legislature, a majority that directs state investments to their areas. With Ohio as a case study, the issues that have created the urban–suburban–rural trichotomy are reviewed and an analysis of the tax returns, by area, to state investments is presented. The findings illustrate that urban centers produce more tax dollars per dollar of state investment than other areas, implying that state underinvestment in urban areas harms overall state tax revenues.     

Tax and expenditure limitations and the fiscal relationships between state and local governments

This paper uses comprehensive data on state and local tax and spending limitations for forty-nine states between 1976 and 1990 to estimate the effects of these limits on the fiscal relationships between state and local government. Results indicate that tax and spending limits on local governments are only partially effective in reducing revenues because political agents bypass limitations by transferring revenue reliance to unconstrained revenue sources, or because unconstrained levels of government take on additional revenue responsibilities. In particular, the empirical analysis demonstrates that binding local government fiscal constraints are associated with reductions in local revenues and increases in state aid to local governments. In contrast, state government limitations are related to reductions in both state and local own source revenues.     

State government purchases in a federalist economy

This paper empirically examines the impact of state government purchasing preference laws on expenditures and revenue of individual states. Purchasing preferences allow firms located within a state to win state contracts without being the low bidder. We find that states with purchasing preference laws spend 3% more in real terms per capita than other states. Evidence is found indicating that the preferences require revenue increases to fund them (the tax base does not rise sufficiently), and that there is some apparent taxpayer resistance to these preferences. This evidence is consistent with a coalition model of state government behavior because it indicates there is significant redistribution of income between groups within the state.We thank the Center for Public Policy at the University of Houston for financial support. This paper benefitted by comments received from Gordon Tullock and an anonymous referee.     

Does Enhanced Veto Authority Centralize Government?

Previous theoretical and empirical research findsenhanced veto authority has little systematic effecton level of spending. This paper takes a new tact,examining the effect of veto power on thecentralization of governmental services. It proposesand tests a model of federalism in which differenttypes of veto authority lead to differing degrees ofcentralization when the executive and legislature havedisparate preferences over the level of governmentthat should provide services. Empirical resultsindicate governors in the United States use enhancedveto authority to centralize state and localgovernment spending.     

Executive Orders and Administrative Control

One of the key recommendations of the Winter Commission was the empowerment of governors over the executive branch. However, key institutions have not evolved in this direction; the long ballot still exists in most states, and the formal powers of governors have strengthened to their probable capacity. The authors suggest that a quasi‐formal power—the gubernatorial use of executive orders—may be a significant tool for empowering the governor in the state administrative realm. Analyzing all executive orders in 49 states for 2004 and 2005, they find variation in the aggregate use of and functions performed through these orders. Many executive orders do allow the government more direction and control of state bureaucracy. Finally, the authors suggest that the study of executive orders may be necessary to understand gubernatorial power in the executive arena and beyond.     

Recipes for Pork and Other Delicious Offerings for the New Administration

Is pork produced by feeble budgetary processes? By fixing weak budgetary procedures, can wasteful spending and opportunities for corruption be reduced? This essay looks at three varieties of pork: earmarked, ad hoc, and presidential. What can be done to curb the excesses of each one? By examining the problem of congressional earmarking, this timely article proposes a new process for controlling “earmarked” pork by supporting a new (constitutional) presidential line‐item veto/reprogramming. “Ad hoc pork,” generated by emergency or stimulus bills, is also analyzed. Its downsides can be fixed, according to the essay, by creating a preapproved roadmap for the appropriations process, thereby enhancing the quality of spending oversight. Finally, “presidential pork” derives from chief executives rewarding congressional allies and from government agencies allocating program resources so as to engender support from congressional members. This third variety of pork can be controlled if agencies improve their operational transparency plus strengthen their procedures for selecting projects. What happens when you put good people in a bad place, good apples in a bad barrel? Do the apples change the barrel, or does the barrel change the apples? —Philip Zimbardo, 2008     

Interstate tax competition after TRA86

When a governor announces that a tax increase is necessary, how do voters decide whether the governor is representing the situation honestly, or just preparing to line his or her pockets? This paper presents evidence that voters may look at the tax increases in neighboring states to obtain information on whether a tax increase is appropriate and, using this information, decide whether to reelect their governor. The data suggest that comparisons with neighbors influence gubernatorial behavior: Governors are more likely to raise taxes when neighbors are doing the same. TRA86 allows us an extra check on the rnodelpresented: I f the marginal dollar taken in state taxes is more costly to state residents, this may increase the extent to which residents use information provided through neighboring states to sort good governors from bad.     

THE HEARTLANDS OF AMERICAN GOVERNMENT: RECENT DEVELOPMENTS IN THE US STATES

Abstract: Over recent years the American states have re-emerged as centres of policy innovation and reasserted themselves within the federal system. In contrast, at least until Bill Clinton's accession to the presidency, the federal government has lost the initiative. Indeed, Clinton's accession from what in the past would have been regarded as an obscure southern governorship symbolises the shift of the states to the centre stage of American politics. This article considers the reasons for this shift, stressing the generational change among the governors, the new economic and social challenges faced by the states and the increasing withdrawal of the federal government from the state sphere. In terms of the prospects for the future of American federalism, federal government is likely to withdraw further under Clinton, reversing the trend of earlier Democratic presidencies. Indeed, thanks to the efforts of governors like Clinton, state governments are now better equipped than ever before to shoulder new responsibilities. Their tax base has widened, though many states have faced difficult budgetary situations in the early 1990s. The organisation and structure of most state governments have been modernised, if slowly given the obstacles inherent in the separation of powers. The new breed of governor has a more managerial approach than earlier generations, and contemporary governors have sought to centralise their power within the executive branch. As state legislatures have also asserted their influence over the executive branch, gubernatorial influence has usually been enhanced at the expense of other power centres within the executive.     

Estimating Tax Evasion Losses: The Road Fund Case

Federal, state, and local government concern about the loss of state revenues from tax evasion has increased in recent years. In order for policymakers to address this issue effectively, more information regarding the nature and magnitude of the problem is needed. This article reports on research that focuses on estimating the level of road fund tax evasion for several states. Estimates of road fund tax evasion are developed from previous research regarding individual state evasion levels, perceptions of road fund tax evasion by state revenue officials, and a statistical estimate of road fund tax evasion.     

Equilibrium Party Government

In this article, I present an equilibrium model of party government within a two-party legislature. The theory is predicated upon members of the majority party having potentially conflicting individual and collective interests. In response to this potential conflict, the members of the majority party endogenously choose a degree of control to grant to their leadership. The equilibrium level of party strength is decreasing in the size of the majority party and increasing in the strength of opposition among members of the minority party. The theory implies that the average performance of W-Nominate estimates of majority party members' ideal points will be a decreasing function of the size of the majority party while the performance of these estimates for members of the minority party will not be affected by the size of the majority party. Using data from the U.S. House and Senate between 1866 and 2004, the theory's predictions are largely consistent with roll-call voting in both chambers.     

Does Earmarked Revenue Provide Property Tax Relief? Long‐Term Budgetary Effects of Georgia's Local Option Sales Tax*

This study examines the long‐term effects of the 1% General‐purpose Local Option Sales Tax (LOST) on the level of property tax in Georgia counties with a pooled interrupted time‐series analysis. The LOST has been earmarked for property tax relief in Georgia counties since 1976, but debates remain on whether the proceeds have been used as additional revenues. We find that the adoption of LOST brought short‐term property tax relief but not long‐term property tax reduction. The result suggests that long‐term property tax relief would not be realized by earmarked revenue without careful policy design to safeguard fungibility.     

Policy decisiveness and responses to speculative attacks in developed countries

Why are some countries able to defend their currencies when there are speculative attacks, while others fail to do so and devalue their currencies? This article suggests that intragovernment factors as well as government‐legislature relations should be considered because many of the policy responses to speculative attacks do not require legislative acquiescence, so that intragovernment attributes will have more substantial effects on the policy responses than those of government‐legislature relations. This article suggests that cleavages within government and its instability have a negative effect on decisiveness. Data regarding speculative attacks in developed countries from the 1970s to the 1990s and the Heckman selection model show that governments with many veto players and with less durability have had difficulty in defending their currencies in the face of speculative attacks. The article also finds that governmental institutional effects can be constrained by central bank independence. The effects become substantially smaller and statistically insignificant when central banks are very independent. The overall results imply that policy indecisiveness induced by some political factors makes governments less able to adopt a new policy equilibrium that is necessary to respond to an exogenous shock such as speculative attack.     

In Search of Successful Reform: The Politics of Opposition and Consensus in OECD Parliamentary Democracies

Why are some governments able to undertake controversial policy reforms and others are not? Conventional wisdom argues that single-party majority governments are best able to implement reforms because there are fewer veto actors within the government that can block the reforms. However, these accounts fail to consider the veto power of societal actors and particularly of trade unions, which can stall reform even in the presence of a unified executive. This paper argues that controversial reforms require broad societal and, consequently, political consensus, which are easier to achieve under minority governments or governments of broad coalitions. Evidence from 22 OECD parliamentary democracies over 35 years shows that minority and large coalition governments have been more successful in reducing social security contributions and pensions than narrower majority governments. This is especially true in countries where trade unions are militant and often resort to industrial action.     

Gaining new insights by going local: determinants of coalition formation in mixed democratic polities

We develop a simple spatial model suggesting that Members of Parliament strive for the inclusion of the head of state’s party in coalitions formed in mixed democratic polities, and that parliamentary parties try to assemble coalitions that minimize the ideological distance to the head of state. We identify the German local level of government as functionally equivalent to a parliamentary setting, such that the directly elected mayor has competencies similar to a president in a mixed national polity. Our findings show that the party affiliation of the head of state is a key factor considered by party members in the legislature when forming coalitions: coalitions in the legislature are more likely to form if they include the party of the head of the executive branch. Furthermore, the policy preferences of the head of the executive branch matter for the legislators’ behavior in the coalition formation process: the smaller the ideological distance between the position of a coalition and the position of the head of state, the more likely a coalition is to be formed.     

State Lotteries for Public Revenue

Lotteries, the state fiscal gimmick of the eighties, operate in jurisdictions encompassing substantially more than half the nation's population and enjoy considerable public acceptance. The revenue they generate is small, rarely more than two percent of state general revenue, it is subject to major year-to-year swings, and it is very expensive to generate, particularly when vendor commissions are recognized as part of cost. Furthermore, lotteries bear a high implicit excise tax rate and, because of the pattern of play across income classes, appears to worsen the overall equity of the revenue system. Their economic impact appears to be that of an internal transfer, although states with major lottery equipment suppliers have most to gain, particularly if they do not operate their own lottery. Lotteries are not destined to become mainstays of government finance, although their spread is likely, even with the fiscal questions they raise.     

Regulating Atomic Energy in the American Federal System

Congress totally preempted the regulation of ionizing radiationin 1946. In 1954 it authorized the private development and useof atomic energy. In 1959, Congress authorized the Atomic EnergyCommission to enter into agreements with states under whicha state can assume certain regulatory responsibilities. As of1987, twenty-nine states had signed agreements. Congress hasenacted several statutes structuring national-state relationsin the field of atomic energy since the Atomic Energy Act of1959. The Low Level Radioactive Policy Act of 1980 makes statesresponsible for disposing of low-level radioactive wastes generatedwithin their respective borders. The Nuclear Waste Policy Actof 1982 established a procedure for locating a site for a high-levelwaste facility. The Secretary of Energy can select a site subjectto a veto by a governor or state legislature and an overrideof the veto by Congress. Two major regulatory developments occurredin 1987. The Nuclear Regulatory Commission amended its rulesand regulations to allow the licensing of new nuclear powerplants in the absence of state and local government participationin emergency evacuation plans for residents living near suchplants. In addition, Congress disregarded its 1982 procedurefor selecting a high-level radioactive waste site by choosingNevada as the site.