Cyclicality of Tax Revenue

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"Cyclicality of Tax Revenue"

Tyler Cowen linked to a paper from Timothy Conley and Bill Dupor (PDF) purporting to show that ARRA led to net job losses. Since I had an ideological motive to dislike the conclusion, I actually read through the paper. This, I think, turns out to be a worthwhile exercise both because they make some important analytic points about the fungibility of ARRA spending and also because I think there are some serious flaws in their analysis. For example:

Exploiting fungibility, we use two instruments to isolate a component of government finance stress that is likely orthogonal to the state’s short-run economic conditions. The fi rst of these two instruments is the pre-recession fraction of each state’s tax revenue from sales taxes. Sales tax revenue is more cyclical than other tax revenue sources; therefore, a state that relies mainly on sales taxes will experience greater fiscal stress during a recession than a state that relies on other (mainly income and property) taxes.

There’s no footnote for this assertion that sales taxes are unusually cyclical, and I’m fairly certain it’s mistaken (see, e.g., this [PDF] from the Kansas City Fed). In particular, corporate income taxes and taxes on capital gains are extremely cyclical. Personal income are also highly cyclical when (as is often the case) there’s a progressive rate structure. Last, while property taxes haven’t historically been all that cyclical, a recession specifically associated with a collapse in housing prices is going to be a special case.

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