Political Drivers of State Fiscal Cyclicality

Abstract

This study examines political factors influencing US state fiscal policy cyclicality. US states largely pursue procyclical fiscal policy, despite the federal government operating countercyclically. Institutional factors, such as balanced-budget rules, have been examined as influences on state cyclicality, with little prior focus on political factors. This article examines the impacts of electoral competitiveness, political polarization, and legislative turnover on state cyclicality. The combination of polarization and turnover is associated with procyclical policy, while the effect of competition on cyclicality is conditional on year from election. Both effects vary during economic upturns compared to downturns. State institutional design implications are considered.