State tax revenue growth and volatility

Abstract

Macroeconomic conditions and tax structures jointly determine the growth and volatility of state tax revenues. Since a variety of economic conditions exist among states, government policymakers should carefully anticipate and consider the possible impacts of proposed tax reform and revenue enhancements on the long-term growth and volatility of their unique tax revenue portfolios. In the short run, states generally cannot alter the volatility and growth rates of their economies. They can, however, change the composition of their tax portfolios to minimize the effects of the business cycle on their fiscal health. For this reason, state officials need to consider the natural tendencies of their economies when formulating tax policy. For example, states with volatile economies might want tax portfolios that minimize the impact of national macroeconomic trends; those with stable economies might consider adopting more aggressive tax portfolios that optimize their tax revenue growth/volatility combinations.Taxation ; State finance ; Revenue