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Are state and local revenue systems becoming obsolete?

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  • Robert Tannenwald

Abstract

As recently as a year ago, state governments were awash in revenue, but reports from state revenue officials suggest that growth in tax receipts has slowed considerably in recent quarters. The flow of tax revenues into state coffers has decelerated primarily because the economy has suffered a severe shock (it was weakening even before September 11) and delayed tax cuts enacted in earlier, more prosperous times have taken full effect. However, many tax analysts believe that long-term economic, technological, and political trends are also partially responsible and will continue to constrain state revenue growth even after the economy revives. ; This article discusses the impact on state and local revenues of three such trends: the shift in the nation's mix of production and consumption from goods to services; the proliferation of electronic commerce; and the intensification of interjurisdictional competition. The author concludes that state and local tax systems are, indeed, out-of-sync with the economy's changing structure. He suggests greater voluntary coordination among tax jurisdictions in tax design and enforcement as the most promising strategy for enhancing revenue productivity. He also notes that more selective use of business tax incentives would help state and local governments to raise adequate revenues without significantly sacrificing other tax policy goals. ; Whatever state and local tax reforms are adopted, the author writes, long-run potential threats to the revenue productivity and stability of subnational revenue systems should be continuously reevaluated. With the federal government shifting its priorities in the wake of the attacks on September 11, the states and their municipalities might be called upon to shoulder significantly wider domestic fiscal responsibilities. They should possess revenue systems that will enable them to meet these responsibilities effectively.

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Bibliographic Info

Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (2001)
Issue (Month): ()
Pages: 27-43

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Handle: RePEc:fip:fedbne:y:2001:p:27-43:n:4

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Related research

Keywords: Revenue ; Tax incentives ; State finance;

References

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  1. Bruce, Donald & Fox, William F., 2000. "E-Commerce in the Context of Declining State Sales Tax Bases," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 1373-90, December.
  2. Graham S. Toft, 1996. "Doing battle over the incentives war: improve accountability but avoid federal noncompete mandates," The Region, Federal Reserve Bank of Minneapolis, issue Jun, pages 37-40.
  3. Philip P. Frickey, 1996. "The congressional process and the constitutionality of federal legislation to end the economic war among the states," The Region, Federal Reserve Bank of Minneapolis, issue Jun, pages 58-59.
  4. Chris Farrell, 1996. "The economic war among the states: an overview," The Region, Federal Reserve Bank of Minneapolis, issue Jun, pages 4-7.
  5. Kenneth E. Poole & George A. Erickcek & Donalad T. Iannone & Nancy McCrea & Pofen Lin Salem, 1999. "Evaluating Business Development Incentives," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number gaw1999.
  6. Fortin, Pierre & Keil, Manfred & Symons, James, 2001. "The Sources of Unemployment in Canada, 1967-91: Evidence from a Panel of Regions and Demographic Groups," Oxford Economic Papers, Oxford University Press, vol. 53(1), pages 67-93, January.
  7. Robert B. Reich, 1996. "Bidding against the future?," The Region, Federal Reserve Bank of Minneapolis, issue Jun, pages 26-30.
  8. Joe Mattey P. & Mark M. Speigel, 1996. "On the efficiency effects of tax competition for firms," The Region, Federal Reserve Bank of Minneapolis, issue Jun, pages 50-51.
  9. Alice M. Rivlin, 1996. "An economic war," The Region, Federal Reserve Bank of Minneapolis, issue Jun, pages 20-25.
  10. Walter Hellerstein, 1996. "Commerce clause restraints on state tax incentives," The Region, Federal Reserve Bank of Minneapolis, issue Jun, pages 60-63.
  11. Oates, Wallace E. & Schwab, Robert M., 1988. "Economic competition among jurisdictions: efficiency enhancing or distortion inducing?," Journal of Public Economics, Elsevier, vol. 35(3), pages 333-354, April.
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Citations

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Cited by:
  1. Luca Gandullia, 2012. "The role of direct taxes in fiscal decentralization," DEP - series of economic working papers 6/2012, University of Genoa, Research Doctorate in Public Economics.
  2. Gary A. Wagner, 2010. "Commentary on "can state and local governments rely on alternative tax sources?"," Regional Economic Development, Federal Reserve Bank of St. Louis, issue Oct, pages 102-7.
  3. Richard H. Mattoon, 2004. "The state of the state and local government sector: fiscal issues in the Seventh District," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 2-17.

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