KC Fed, Report: Understanding State and Local Government Spending over the Business Cycle

“S&L government expenditures represent a significant portion of aggregate GDP and fulfill an essential role in the provision of public goods and services. S&L government spending is often thought to be procyclical and recover only sluggishly following recessions. We docu­ment that this pattern did not systematically emerge until the mid- 1980s. In discussing possible explanations for the increased procyclical­ity, we suggest that changes in the cyclicality of income tax revenues may have played an important role. In particular, a growing reliance on income tax revenues coupled with an increase in the procyclicality of these revenues may account for the change in expenditure cyclicality.”