New Normal? The Declining Relative Importance of State Taxes (original) (raw)
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This article uses an income-distributional approach to state tax sensitivity to examine the assumption that consumption taxes are more stable than income taxes. We estimate the 2007 to 2009 change in tax revenues as a function of state income distributions and tax burdens by income class. We estimate tax burdens as a function of income tax shares and consumption tax shares. We then simulate the change in tax revenues with tax shares at the national average. If high-income-tax states were to lower their reliance on this tax, the revenue decline during the recession would have been greater. For high consumption tax states, the revenue decline under higher income tax shares would have been smaller. Had they shifted toward consumption taxes, income tax reliant states would not have reduced the cyclical sensitivity of tax revenues during the Great Recession. The interaction between tax burdens and recession shocks by income class is key to these results.
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The cyclical variability of state income and sales taxes is examined for each state by estimating the degree to which each tax follows the state's overall revenue cycle. Income taxes are found to be consistently more cyclically variable, and less predictable, than sales taxes. Factors explaining differences in cyclical variability across states are then identified in a regression model. States without income taxes have less cyclically variable revenues than states with both income and sales taxes, suggesting that cyclical variability in states without income taxes could not be reduced by broadening the tax base to include an income tax. (JEL H2) One of the problems that has faced state governments is the cyclical variability of state revenues. Revenues tend to move procyclically while the demand for state government programs tends to be countercyclical. While it would be possible for state governments to limit their spending during prosperous years to set aside reserves that could be drawn down during economic downturns, in practice, states have not done this. Thus, the procyclical nature of revenues along with the countercyclical nature of demands for services combine to produce state budget crises during recessions.
2006
DATA SOURCES: Individual years of Unemployment rate electronically provided from the BLS for 1991-1976 (some of the larger states go back to 1970)(contact person at BLS: Yvonne Terwilliger). Missing data back to 1970 was filled in with unemployment rate data from Professor Alicia Munnell (Boston College). No data could be found prior to 1970. The UNEMPLOYMENT variable used in replication is the average value for 1970-1991 (not 1960-1991).
The Disappearing State Corporate Income Tax
SSRN Electronic Journal, 2000
This paper examines alternative explanations for the decline over the past two decades in state corporate income taxes relative to the state economy. We employ a survey of state tax administrators, individual tax returns from Georgia and Utah, and panel data to explore the importance of tax policy, tax planning, and economic factors on the trend in state corporate taxes. We fi nd that corporate tax planning and economic factors account for much of the relative decline, and that state tax policy changes are important factors. However, federal tax changes had only a modest effect during this period.
Another look at tax policy and state economic growth: The long-run and short-run of it
Economics Letters, 2015
This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain. Highlights We use a spatial Durbin model to estimate the short and long run effects of taxes on state economic growth Data for 48 contiguous U.S States Taxes have negative short and long run direct, spillover, and total effects on state economic growth *Highlights (for review)