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Free Content State Budget Deficit Dynamics and the California Debacle

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This paper analyzes the recent experience with state budget deficits in the United States, with an in-depth analysis of the California experience. Compared to prior recessions, states were slower to make adjustments in taxes and spending this time. The paper explores a variety of reasons for this difference including changes in the legal, political, and institutional environments, the unusual increase in capital gains revenue during the boom preceding the recession, and the inherent difficulties in forecasting revenues, particularly those derived from capital income. As the case study from California illustrates, states made long term commitments from temporary revenue sources and were required to make budgetary decisions in the face of very incomplete information about current and projected tax receipts.

Document Type: Research Article


Publication date: May 1, 2004

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  • The Journal of Economic Perspectives (JEP) attempts to fill a gap between the general interest press and most other academic economics journals. The journal aims to publish articles that will serve several goals: to synthesize and integrate lessons learned from active lines of economic research; to provide economic analysis of public policy issues; to encourage cross-fertilization of ideas among the fields of thinking; to offer readers an accessible source for state-of-the-art economic thinking; to suggest directions for future research; to provide insights and readings for classroom use; and to address issues relating to the economics profession.
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