Economic Conditions and State Tax Policy: Experience over the Last Decade and Implications for the Future

نویسنده

  • David Merriman
چکیده

economic times, states often legislate tax increases to create additional revenues, even though standard macroeconomic theory suggests that doing so dampens economic activity. Over the last decade or so, state governments have taken on more responsibility for administering social welfare programs. Thanks to abundant federal aid, a robust national economy, and a decline in the number of participants in some social programs, most states have had the resources to fund social programs at or above historical levels. But what will states do when the economy inevitably slows down? Much can be learned from studying the past. Despite many important changes, the political, economic, and social forces that have shaped state policymaking for decades persist. In fact, the best predictors of states’ future policy choices are those they have made in the past. This brief reviews a decade’s worth of data on changes in state income and sales taxes, investigating how state tax policy has responded to the business cycle and discussing long-term trends in the relative use of the sales and income taxes from 1988 through 1998. Before this research, Dye and McGuire (1999) investigated the relationship between states’ real tax revenues and gross state products (GSP) from 1977 to 1996. They found that tax revenues increased and decreased less than proportionately with economic growth. On average, for the United States as a whole, a 1 percent increase in GSP was associated with only a 0.27 percent increase in sales tax revenues and only a 0.66 percent increase in income tax revenues. Dye and McGuire (1999) “infer from these results that the positive relationship between the bases of the various taxes and GSP . . . is greatly muted [by policy changes].” Inference is necessary because Dye and McGuire did not have access to direct evidence about tax policy changes.

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تاریخ انتشار 2000