A well‐established literature argues that fiscal illusion increases the level of government expenditure. This paper focuses on the proposition that fiscal illusion also influences the cyclicality of government expenditure. Predictions are formed with reference to government reliance on high income‐elasticities of indirect tax revenues and on intergovernmental transfers. Predictions are tested with reference to the expenditures of 36 states in the United States from 1980 to 2000. Government expenditures are more likely to be procyclical when citizens systematically under‐estimate the cost of taxation.