Fiscal Dynamics of State and Local Governments
State and local governments account for roughly one eighth of US employment and GDP. They play a key role in delivering many critical services such as education, transportation, public safety, and health care as well as key components of the social safety net. There is a stark contrast between the fiscal experiences of these governments during the Great Recession of 2007–2009 and the pandemic recession of 2020. In 2009, revenues and employment fell sharply. Employment recovered slowly in subsequent years and was a drag on the broader macro-economy. In the pandemic recession, when federal support was greater than during the Great Recession, state and local government employment declines were smaller than those in the private sector, and despite early forecasts of fiscal pain, revenues fell less than projected. The experiences during these two disruptive periods can shed new light on the role of fiscal institutions in mediating state and local budget dynamics during crises, as well as on long-standing state and local fiscal questions such as the impact of intergovernmental grants.
The state and local public sector faces a number of long-term fiscal challenges, including declining population in some regions, shrinking gasoline tax revenues to finance infrastructure, an increasingly mobile employment tax base as remote work becomes more prevalent, rising cost pressures from health insurance programs (particularly Medicaid) and public pension obligations, and potential future reductions in support from the federal government.
To promote research on the fiscal dynamics of state and local governments and on how budgetary institutions and other factors affect them, the National Bureau of Economic Research (NBER), with the generous support of the Smith Richardson Foundation, will convene a research conference in Cambridge, MA, on September 11–12, 2025. The organizers will be research associates Jeffrey Clemens (University of California, San Diego) and James Poterba (MIT).
The organizers welcome research contributions focused on the key drivers of state and local fiscal positions, the fluctuations in these positions during the Great Recession, the COVID-19 pandemic, and other disruptive periods, and the factors that contribute to both long-run and short-run changes in fiscal outcomes. Examples of research topics that are within scope include, but are not limited to:
- How have local governments responded to rising property values and how do fluctuations in house prices affect revenues and service levels?
- What is the effect of outmigration from states or cities on the revenue base, and what fiscal adjustments result when the revenue base contracts?
- How has the rise in remote work affected revenue collections and the elasticity of state and city tax bases, and what are the implications for fiscal policy?
- What are the implications for states of changes in the federal cost share of Medicaid expenditures, such as those enacted in the Affordable Care Act? What factors have influenced state responses to the changing structure of the Medicaid program?
- How did the CARES Act’s Continuous Coverage Provision affect state and local fiscal positions? Are there broader lessons about the fiscal cost of government insurance programs that can be drawn from the COVID-19 experience?
- How do states and localities respond to intergovernmental grant programs? What can be learned from expanded federal grants during the COVID-19 period? What institutional or other factors determined how federal grants were allocated between current transfer spending, capital outlays, and rainy-day funds?
- What determines the composition of a state’s tax base between personal income, corporate income, sales, and property taxes? How does the fiscal resilience of state and local budgets depend on this mix of tax instruments?
- How have sub-federal governments responded to the growth of defined benefit pension obligations, and what are the fiscal effects of these responses?
- Are there substantial differences across jurisdictions in the elasticity of consumer spending between online and bricks-and-mortar retailers, and how does this affect fiscal outcomes?
- How does the capital market affect tax and expenditure decisions of state and local governments? Do the algorithms used by bond rating agencies affect fiscal choices?
- Are balanced-budget rules important in affecting how states respond to economic downturns or to the receipt of federal transfers?
- What explains the dynamics of state and local government employment and of wage disparities between the public and private sectors? How do fiscal factors, such as intergovernmental grants and the growth of a jurisdiction’s tax base, affect the aggregate wage bill of a jurisdiction?
- How do procurement rules for goods and services affect overall state and local government spending?
The organizers welcome finished papers as well as early-stage papers that will be completed by September 2025. Upload submissions by 11:59pm ET on February 27, 2025.
Theoretical as well as empirical papers are welcome. Submissions are encouraged from researchers with and without NBER affiliations, from academia, government, or the private sector, from early career scholars, and from researchers from under-represented groups. Please do not submit papers that have been accepted for publication and will be published by the time of the conference.
Authors of papers selected for the program will be notified in March 2025, and they will be invited to participate in a virtual pre-conference later in the spring.
The NBER will provide a modest honorarium to the authors of papers that are selected for presentation and will cover hotel and economy-class conference travel for up to two authors per paper. Subject to interest among the presenters, the papers on the program may be considered for a journal special issue or an NBER conference proceedings volume.
Please direct questions about this project to confer@nber.org.