Skip to main content

State budget stabilization fund adoption: Preparing for the next recession or circumventing fiscal constraints?


The high rate of budget stabilization fund adoption during the 1980s is often attributed to the 1980–1982 recession. In this view, states adopted funds to prevent a recurrence of the fiscal crises experienced during that recession. An alternative hypothesis is that some funds adopted during this period were intended to circumvent tax and expenditure limit laws. We find that states with TELs in place were significantly more likely to adopt statutory funds, but were significantly less likely to adopt funds with stringent deposit and withdrawal rules, suggesting that some funds were adopted to circumvent existing fiscal constraints.

This is a preview of subscription content, access via your institution.


  • Abrams, B., & Dugan, W. (1986). The costs of constitutionalrestraints on government spending. Public Choice, 49(2),101–116.

    Article  Google Scholar 

  • Advisory Commission on Intergovernmental Relations. (1987). Fiscal Discipline in the Federal System: Experience of theStates, Washington, DC.

  • Advisory Commission on Intergovernmental Relations. (1992). Significant Features of Fiscal Federalism, Volume I, Washington,DC.

  • Alt, J. E., & Lowry, R. C. (1994). Divided government and budgetdeficits: Evidence from the states. American PoliticalScience Review, 88, 811–828.

    Google Scholar 

  • Bails, D. (1990). The effectiveness of tax-expenditurelimitations: a re-evaluation. American Journal of Economicsand Sociology, 49(2), 223–238.

    Google Scholar 

  • Bohn, H., & Inman, R. P. (1996). Balanced budgets and publicdeficits: Evidence from the U.S. states. NBER Working Paper No.5533.

  • Cox, J., & Lowery, D. (1990). The impact of the tax revolt erastate fiscal caps. Social Science Quarterly, 71(3), 492–590.

    Google Scholar 

  • Douglas, J. W., & Gaddie, R. K. (2002). State rainy day fundsand fiscal crises: Rainy day funds and the 1990–1991 recessionrevisited. Public Budgeting and Finance, 22(1), 19–30.

    Google Scholar 

  • Dugan, W. (1988). The effects of tax or expenditure limits onstate government. Center for the Study of the Economy and theState, Working Paper No. 54.

  • Elder, H. W. (1992). Exploring the tax revolt: An analysis of theeffects of tax and expenditure limitations. Public FinanceQuarterly, 20, 47–63.

    Google Scholar 

  • Feenberg, D. R., Gentry, W. M., Gilroy, D., & Rosen, H. S.(1989). Testing the rationality of state revenue forecasts. Review of Economics and Statistics, 71(2), 300–308.

    Google Scholar 

  • Gentry, W. M. (1989). Do state revenue forecasters utilizeavailable information? National Tax Journal, 42(4),429–439.

    Google Scholar 

  • Gold, S. D. (1983). Preparing for the next recession: Rainy dayfunds and other tools for the states. Legislative Finance PaperNo. 41, National Conference of State Legislatures.

  • Gold, S. D. (1995). The Fiscal Crises of the States: Lessonsfor the Future. Washington, DC: Georgetown University Press.

    Google Scholar 

  • Gramlich, E. M. (1991). The 1991 state and local fiscal crises. Brookings Papers on Economic Activity, 2, 249–287.

    Google Scholar 

  • Holcombe, R. G., & Sobel, R. S. (1997). Growth andVariability in State Tax Revenue: An Anatomy of State FiscalCrises. Greenwood Press, Westport, CT.

    Google Scholar 

  • Knight, B., & Levinson, A. (1999). Rainy day funds and stategovernment savings. National Tax Journal, 52(3), 459–472.

    Google Scholar 

  • Levinson, A. (1998). Balanced budgets and business cycles:Evidence from the states. National Tax Journal, 51(4),715–732.

    Google Scholar 

  • National Association of State Budget Officers. (1997). BudgetProcesses in the States, Washington, DC.

  • Poterba, J. M. (1994). State responses to fiscal crises: Theeffects of budgetary institutions and politics. Journal of Political Economy, 102(4), 799–821.

    Article  Google Scholar 

  • Rueben, K. (1995). Tax limitations and government growth: Theeffect of state tax and expenditure limits on state and localgovernment. Unpublished manuscript, Massachusetts Institute ofTechnology.

  • Sobel, R. S. (1998). The political costs of tax increases andexpenditure reductions: Evidence from state legislative turnover.Public Choice, 96, 61–79.

    Article  Google Scholar 

  • Sobel, R. S., & Holcombe, R. G. (1996a). The impact of staterainy day funds in easing state fiscal crises during the1990–1991 recession. Public Budgeting and Finance, 16(3), 28–48.

    Google Scholar 

  • Sobel, R. S., & Holcombe, R. G. (1996b). Measuring the growthand variability of tax bases over the business cycle. National Tax Journal, 49(4), 535–552.

    Google Scholar 

  • Stansel, D. (1994). Taming leviathan: Are tax and expenditurelimits the answer? Cato Policy Analysis No. 213. Cato Institute,Washington, DC.

  • Wagner, G. A. (2003). Are state budget stabilization funds onlythe illusion of savings? Evidence from stationary panel data. Quarterly Review of Economics & Finance, 43(2), 213–238.

    Google Scholar 

  • Wagner, G. A. (2001). Political control and public sector savings:Evidence from the states. Public Choice, 109(1–2), 149–173.

    Google Scholar 

  • Wagner, G. A. (1999). Essays on the Political Economy of StateGovernment Saving and the Role of Budget Stabilization Funds.Unpublished doctoral dissertation. West Virginia University.

Download references

Author information

Authors and Affiliations


Corresponding author

Correspondence to Gary A. Wagner.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Wagner, G.A., Sobel, R.S. State budget stabilization fund adoption: Preparing for the next recession or circumventing fiscal constraints?. Public Choice 126, 177–199 (2006).

Download citation

  • Accepted:

  • Issue Date:

  • DOI:


  • Alternative Hypothesis
  • Public Finance
  • State Budget
  • Expenditure Limit
  • Stabilization Fund