State Tax Policies and the Household Response to Changes in Federal Spending

Can differences in US state tax policies lead to differences in state fiscal multipliers? This paper argues the answer is yes. My finding is based on a novel empirical investigation and an extension of a workhorse macro model. First, I present evidence on sizable differences in uninsured earnings risks across states. These differences are driven by state specific earnings risk as well as distinct amounts of insurance provided by state tax and transfer policies. Second, in a multi-regional heterogeneous agent model with incomplete markets, I show that these risk differences lead to distinct distributions of households’ marginal propensities to consume (MPCs). The corresponding aggregate state MPCs are sufficiently different to cause uniform (non-state-targeted) federal fiscal interventions such as stimulus payments to have different outcomes at the state level.