Tax Policy Responses to Revenue Shortfalls

Research Report

Tax Policy Responses to Revenue Shortfalls

April 22, 2003

Abstract

We compare state tax policy responses to the recessions that began in July 1990 and April 2001. Tax revenue declined more in the 2001 recession even though the output shock was smaller. In the early 1990s, states quickly altered tax policy to replace a large share of lost tax revenue. In the recent recession, states have made few tax policy changes to enhance revenue except for increasing tobacco taxes. We present some reasons for this behavior and argue that states are on the verge of missing an opportunity to improve their tax systems.

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