Minimizing the Harm Of State Fiscal Volatility

David Gamage and Jeremy Bearer-Friend This report’s primary concern is how U.S. state governments should respond to the fiscal volatility created by their balanced budget constraints. Applying the principles of risk allocation theory to this recurring problem, we conclude that states should primarily adjust the rates of broad-based taxes as their economies cycle, rather than fluctuating public spending. More specifically, states should raise their broad-based tax rates during economic downturns…