How Do Balanced Budget Rules Impact Fiscal Performance Based On Revenue Structure?: Evidence From U.S. States

Abstract

Revenue condition needs to be considered in the design of balanced budget rules (BBRs), because revenue stream, which varies across state governments, is an important factor in balancing the budget. Also, revenue factors may influence state responses to economic crises through the employment of BBRs.Thus, this study examines the influence of BBRs on states’ fiscal performance depending on revenue structure using a panel data set from 1997 to 2016. The results demonstrate that the strongest BBRs are effective in reducing deficit shocks, although this amplifies fiscal volatility. However, the weakest BBRs play a role in stabilizing volatility. Considering revenue structure, if a state government is concerned about deficit shocks, it would do well to adopt the strongest BBRs, with lower levels of own-source revenue. Conversely, if a state government wishes to pursue fiscal stabilization, it should adopt the weakest BBRs, with lower levels of own-source revenue and less diversified source.