The Impact of State Fiscal Policy on States' Resilience Entering the Great Recession

The U.S. economy entered the Great Recession in December 2007 and exited in June 2009. This national statistic obscures a wealth of state-level data shedding light on the policies and conditions that helped some states withstand that recessionary shock for a time. In this study, we used that state-level data in a parametric regression model, known as survival analysis, to estimate the effects that a state’s fiscal policy had on the timing of its entry into the Great Recession. Consistent with earlier, more general, studies focusing on economic growth, we found that taxes have the potential to hasten the start of a state’s recession, while expenditures could defer that event. However, not all types of taxes and expenditures were equivalent in terms of their effect on recessionary timing. Most notably, our results showed that corporate income taxes had a different timing effect than sales, property, and individual income taxes. In addition, although total expenditures tended to delay the Great Recession’s onset, relatively few individual expenditure types had a statistically-significant impact on recessionary timing. Overall, our results suggest that, while taxes likely increase a state’s recessionary risk and expenditures likely decrease it, that narrative is an oversimplification of the complex role played by fiscal policy in determining a state's ability to resist a negative economic shock like the Great Recession.