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Are state and local revenue systems becoming obsolete?

  • Robert Tannenwald

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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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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  1. Alice M. Rivlin, 1996. "An economic war," The Region, Federal Reserve Bank of Minneapolis, issue Jun, pages 20-25.
  2. Timothy J. Bartik, 2004. "Economic Development," Book chapters authored by Upjohn Institute researchers, in: J. Richard Aronson & Eli Schwartz (ed.), Managememnt Policies in Local Government Finance, pages 355-390 W.E. Upjohn Institute for Employment Research.
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  7. 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.
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  9. Chris Farrell, 1996. "The economic war among the states: an overview," The Region, Federal Reserve Bank of Minneapolis, issue Jun, pages 4-7.
  10. 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.
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