Studies in Applied Public Finance

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This project pursues research on several distinct questions in public economics. The first part considers the impact of fiscal institutions on the dynamics of state tax and expenditure policy. This research uses states as "laboratories of democracy" to shed light on how different institutional arrangements affect the way governments respond to fiscal shocks. It focuses on the experience of the 1980s, and explores how balanced budget rules and anti-deficit laws affected the way states respond to unexpected budget deficits. The second is a more traditional study on the incentive effects of tax policy. It focuses on the effects of 401(k) tax-deferred saving plans on household saving decisions. These plans were the fastest growing tax-favored saving vehicle in the 1980s, yet there is little evidence on how the availability of these plans and the federal and program- specific limits on individual contributions, affect saving behavior. This project helps fill this gap. The third part is also concerned with tax policy, but focuses on the increasingly important question of how tax incentives affect the demand for health insurance. The research develops new estimates of the elasticity of demand for both coverage and the amount of coverage. The first part of this project addresses one of the central issues in political economy - the effect of fiscal institutions, such as balanced-budget amendments or supermajority requirements for tax increases, on tax and expenditure policies. Because federal budgetary institutions exhibit relatively little variation, empirical research on budgetary institutions has focused on interstate or international comparisons. The difficulty with past studies is that they do not take into account the possibility that states with anti-spending voters are more likely to adopt certain fiscal institutions. For example, the apparent effectiveness of state constitutional balanced budget requirements in restraining government expenditures could simply reflect the preferences of the voters in states with these requirements. This project takes a novel and ingenious approach to this problem. It explores how different fiscal institutions affect the dynamics of state taxes and spending following an unexpected shock to the state deficit. The last half-decade, when many states have experienced substantial fiscal stress, provides a natural opportunity for exploring this link between fiscal institutions and fiscal outcomes. A systematic study of recent state experience with unexpected deficits is also a timely important topic by itself.