Discussion Paper

Fiscal Drag from the State and Local Sector?

Abstract: With July just around the corner, most cities and states are preparing for the start of a new fiscal year. Since the start of the recent recession, some have worried that fiscal stress on the sector would result in massive municipal bond defaults. At the end of 2011, many breathed a sigh of relief as aggregate state government revenues finally re-attained the peak they had achieved before tumbling during and after the recession. Unfortunately, relief may be premature. When adjusted for inflation, 2011 state tax revenues were still below their levels of four years ago, and local tax revenue continues to decline. In this post, we explore how the state and local public sector functions as part of the broader economy, how it responded to the most recent downturn, and why it could potentially be a drag on economic activity for years to come.

Keywords: deficits; local government; State government;

JEL Classification: H00;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2012-06-27

Number: 20120627