State and Local Fiscal Policy

State and Local Fiscal Policy

Thinking Outside the Box?

Studies in Fiscal Federalism and State–local Finance series

Edited by Sally Wallace

In this broad and illuminating work, experts on public finance discuss innovations in state and local tax policy that have been implemented or considered over the course of the last three decades. The authors provide original work that analyzes whether state and local governments have ‘gone outside the box’ to deal with the strains of current public finances or have gotten along by adhering to the status quo. This book provides researchers, students and policy makers with evaluations and analyses by well-known scholars in the area of state and local public finance of actual practices and analysis of potential policy changes for the future.

Chapter 3: Genesis of State–Local Creativity

Robert Tannenwald, Jennifer Weiner and Igor Popov

Subjects: economics and finance, public finance, public sector economics, politics and public policy, public policy


Robert Tannenwald, Jennifer Weiner and Igor Popov1 INTRODUCTION The premise of this chapter is that state and local governments in the USA have been forced to become more creative in raising revenue in recent years. Actually, states have exhibited creativity in raising revenues when confronting past challenges. In each recession, and with each wave of increased responsibility, states have come up with all sorts of clever ways to boost receipts. The Great Depression spawned state sales taxes. The property tax revolt of the late 1970s and early 1980s induced greater reliance on user fees and charges. The severe contraction in state revenues in the early 1990s inspired creative ‘Medicaid arrangements’ – a euphemism for clever exploitation of loopholes in federal regulations to divert money intended for health care into state general funds. Nevertheless, some ‘bread and butter’ options, such as surcharges and increases in statutory tax rates, have been enacted less frequently during the 1990s and 2000s than they were in the 1970s and 1980s. Indeed, the 1990s were marked by a proclivity for tax cuts, a few years of discipline on the spending side, and increased federal aid (relative to very depressed levels in the 1980s), leading to a build-up of reserves. States have been drawing down these reserves since the mid-2000s to help make ends meet. Furthermore, interest has intensified in forms of taxation not as widely or seriously considered in the past. Gross receipts taxes and value added taxes are perhaps the most prominent cases in point. ‘Loophole...

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