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© TAX ANALYSTS. Reprinted with permission.
Note: This report is available in its entirety in the Portable Document Format (PDF).
States and their local governments vary both in their
needs to provide basic public services and in their
abilities to raise revenues to pay for those services. A
forthcoming joint study by the Tax Policy Center and the
New England Policy Center at the Federal Reserve Bank
of Boston uses the Representative Revenue System and
the Representative Expenditure System frameworks to
quantify those disparities across states by comparing
each state’s revenue capacity, revenue effort, and necessary
expenditures with the average capacity, effort, and
need in states across the country. Below, we present main
concepts and selected findings from the study. For each
state, we define the key concepts as follows:
- Revenue capacity is the total revenue that a state (and
its localities) would have raised if it were to apply a
uniform set of taxes and charges "representative’’ of
policies prevailing across the 50 states. The calculations
cover a standard set of taxes and charges for all
states. For each tax term, the representative rate is
the ratio of actual nationwide collections to the
potential nationwide tax
base.
- Revenue effort is the ratio
of actual revenues to revenue
capacity. Revenue
effort provides an index
of the extent to which a
state and its local governments
are taxing their
available resources compared
with other states.
- Expenditure need is a
measure of the cost of
providing public services
at an average level
given the state's characteristics.
It is the sum of adjusted expenditure shares for a set of identified
expenditure items based on demographic and economic
circumstances. Those shares also reflect price
differences in the cost of providing service. The
expenditure share for education, for example, depends
on the number of school-age children, the
number of those children who live in poverty, and
factors that affect the cost of providing education,
such as teacher salaries.
- Expenditure effort is the ratio of actual expenditures
to expenditure need.
- Fiscal capacity is the ratio of revenue capacity to
expenditure need.
The study estimates that New England and Middle
Atlantic states tend to have high revenue capacity and
low expenditure needs compared with the national average.
Thus, states in those two regions tend to have high
fiscal capacity, or a relatively high capability to cover
their expenditure needs using their own resources. South
Central states, however, have low fiscal capacity — that
is, a low level of revenue-raising capacity given what it
would cost to provide a standard set of public services to
their citizens.
For more findings, including details by state and an
explanation of methods used, see Yesim Yilmaz, Sonya
Hoo, Matthew Nagowski, Kim Rueben, and Robert Tannenwald,
"Measuring Fiscal Disparities Across the U.S.
States: A Representative Revenue System/Representative
Expenditure System Approach, Fiscal Year 2002," Urban
Institute and the Federal Reserve Bank of Boston, October
2006.
Note: This report is available in its entirety in the Portable Document Format (PDF).
The Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, provides independent, timely, and accessible analysis of current and emerging tax policy issues for the public, journalists, policymakers, and academic researchers. For more tax facts, see www.taxpolicycenter.org/taxfacts.
The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
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