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.