Cyclical Variability in State Government Revenue

Research Report

Cyclical Variability in State Government Revenue

Can Tax Reform Reduce It?
August 25, 2003


Slowdowns in economic activity tend to significantly reduce state tax revenue growth, making it difficult to fund existing programs. This paper outlines tax reforms that policymakers may pursue to ease periods of fiscal stress. States can reduce the variability of revenue from the two most important sources, sales taxes and income taxes, by eliminating exemptions for food purchases and relying on a less progressive income tax. In addition, expenditures that are difficult to cut during downturns should be financed with stable revenue sources, while more variable revenue sources should be used to finance programs that can be cut more easily.

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