Three Essays on Fiscal Stress and Financial Stability in State Government Finance

State government finance is a substantial endeavor in the United States. The management of a multitude of revenues and expenditures often involves some level of fiscal stress. In an age of increased public scrutiny, policymakers must be mindful of possible causes of fiscal stress, and the policy options available to mitigate fiscal stress and increase financial stability. This dissertation contains three essays that examine different elements of fiscal stress, and in some cases, the applicable policy responses. Chapter two examines rainy day funds and their countercyclical goal of reducing recessionary fiscal stress. This essay takes a different approach from much of the literature, by using forecast residuals to quantify fiscal stress as tax revenue volatility and searching for any relationship between rainy day funds and states that had greater volatility. Empirical results indicate states that experience positive residuals, that is actual tax revenues greater than the forecast trend line, had greater rainy day fund balances. Chapter three focuses on the problem of lost revenues facing states from e-commerce. Due to Supreme Court decisions, businesses that do not have a physical location, or nexus, in a state are not required to collect sales and use taxes. To date, the policy response to lost revenue that has gained the most traction is the Streamlined Sales and Use Tax Agreement. Results indicate that states with local option sales taxes and higher sales tax rates were more likely to adopt this agreement. Chapter four scrutinizes state unemployment trust funds, which are used to fund state unemployment insurance programs. If state funds run short of money during recessions due to the larger number of individuals drawing benefits, then states must borrow from the federal government’s unemployment trust fund. This creates another liability that must be managed by state governments. Empirical findings show that several features of programs affect balances and the probability of taking a loan from the federal fund including the taxable wage base, weekly benefits, and unemployment tax rates. This dissertation concludes by summarizing the results and exploring future research possibilities on the three essay topics