Separation of Powers and the Tax Level in the U.S. States

We estimate a non-linear and discontinuous relationship between the tax level and the degree of alignment between the legislature and the governor, measured as the number of seats in the legislature that belong to the governor’s party. In the states with the line-item veto, there is a jump in the tax level at the point where the government switches from divided to unified. With a regression discontinuity design, we show that this jump can be interpreted as a causal effect. We propose a simple model to account for this non-linear relationship. The sequential nature of the budget bargaining game, i.e. the legislature proposes and the governor cuts with the line-item veto, implies that the tax level is determined by the overlap between the supporters of the governor and the supporters of the legislative majority. Changes in the size of the overlap determine the tax level.