Three Characteristics of Tax Structures Have Contributed to the Current State Fiscal Crises

Research Report

Three Characteristics of Tax Structures Have Contributed to the Current State Fiscal Crises

August 4, 2003

Abstract

State tax revenue growth slowed in 2001 and nominal tax revenue actually declined in 2002, the first decline in at least 30 years. The personal and corporate income tax and the sales tax all yielded lower revenues in 2002 than in the previous year. Three characteristics of the tax structure have been important factors in the revenue decline. First, the corporate income and sales tax bases are eroding, and this process accelerated during the past several years. Second, state tax structures are pro-cyclical. Third, except for the personal income tax, state taxes are inelastic. States could have lessened the impacts of the significant revenue slowdowns by building larger rainy day funds in the 1990s, when revenues were growing faster than personal income.

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