Party Affiliation Effects on Economic Policy: Evidence from the U.S. States Legislature and Executive

While the influence of the ideology of the governor on economic policy has been investigated often, little is known about the effect of the legislature and how it compares to that of the governor. Therefore, the effects of the party affiliation of the majority party in the lower house of the U.S. states on the amount of taxes, expenditures and their structure are investigated in this paper for the time period between 1970 and 2008. Additionally, the effects of the legislature are compared to the ones of the governor by estimating both effects for a shorter time span between 1970 and 1995. A Regression Discontinuity Design is implemented to exploit the randomness of party affiliation in the states legislature and executive at close election outcomes. The results show that the legislature has a minor effect on the economic policy, despite Democratic majorities spending less on public welfare and more on other categories. The governor, in comparison, affects both the size of the government finances and the structure of the expenditures. Democratic gov-ernors set a higher tax rate and seem to spend less on healthcare than Republican governors. Overall, the results give indications for a higher importance of the party affiliation of the executive for economic policy compared to the legislature, while the direction of the effects are unexpected.