Pages: 11

This chapter explains several essential concepts related to states’ long-term fiscal health: structural deficits, fiscal sustainability, and fiscal stability. It then outlines the mission of this book—studying state tax policies enacted in the post–Great Recession era and examining their impact on state-level fiscal stability. State governments play an important role in providing essential services to their citizens, but they face constant fiscal challenges. Fiscal stability refers to a fiscal system that can maintain a certain level of public services without experiencing disruption. It is a broad concept requiring revenues generated to support expenditures in the short and long terms. Economic cycles tend to produce revenue fluctuations, such as revenue decline accompanied by service demand increases during the downturns. Structural deficits—the gaps caused by revenue and expenditure policies—threaten state fiscal sustainability and long-term fiscal stability. To achieve fiscal stability, state governments should follow several basic and widely recognized tenets: take a balanced approach to addressing both revenue and expenditure issues, pursue revenue diversification, broaden tax bases, and levy reasonable tax rates.

Pages: 38

This chapter examines the seven functional categories of state expenditures: public education, Medicaid, higher education, corrections, transportation, public assistance, and all others. The discussion looks at the spending trends for each spending category, the cost factors that drive up the spending, and issues that states face in fulfilling the expenditure needs. It also examines the restrictive state spending over which governors and state legislators exert little control. This chapter intends to provide an overview of state spending responsibilities that state tax revenues are used to support and highlight the fact that a large share of state spending is outside the annual budgetary control.

Pages: 16

The Great Recession imposed one of the worst fiscal crises for state governments since the Great Depression. Immense revenue shortages were not only the result of cyclical fiscal vulnerability but also structural imbalances. This chapter first reviews the dire fiscal situations state governments faced during the Great Recession, their responses, and the lessons they learned. The discussion will then examine the tax actions states pursued and the impact on state fiscal stability. State legislators in many states took tax actions in an attempt to reform their tax systems. However, significant tax changes took place in a small number of states, and the overall changes in income and sales taxes did little to improve state fiscal stability.

Pages: 30

This chapter investigates the tax policy changes in three states (i.e., California, New York, and Connecticut), examining how and why they raised their major taxes (e.g., personal income tax, corporate income tax, and sales tax). The discussion will first reveal the political and fiscal context under which the taxes were increased and then explain the impact these measures will have on their long-term fiscal health and highlight issues that impede state fiscal stability. California, New York, and Connecticut are investigated because they were among the states with the largest revenue shortfalls during FY 2009 - FY 2013. They were also the states that made significant tax reforms during the post-Great Recession years. In each case, the tax actions generated a good amount of tax revenue, allowing the states to weather the financial crisis, but they did little to improve their long-term fiscal stability. Limited efforts were made to broaden the tax base, and the tax structure remains relatively unchanged.

Pages: 19

This chapter examines the tax-cut efforts implemented in Kansas and Missouri and their impacts on the states’ fiscal systems. In the post-Great Recession era, the economy was on a slow recovery, and states were still facing the same structural imbalances and fiscal uncertainties that jeopardized their finance during the Great Recession. Instead of pursuing a cautious approach to restore state fiscal capacity, tax-cut proponents insisted tax cuts would allow the state to become more competitive, leading to more economic growth. Kansas’ tax-cut plan was ambitious but did not deliver its core promise of economic prosperity. Instead, it dug a big fiscal hole for the state. Missouri lawmakers undertook decade-long tax-cut efforts. SB 509, enacted in 2014, delivered a big tax cut and also incorporated a revenue trigger, enabling future cuts. The continuous tax-cut efforts resulted in severe declines for a wide range of public services. The stories in both states show tax cuts leading to revenue declines, thereby weakening the government’s capability to provide basic public services and eroding fiscal stability. These cases illustrate the importance of proceeding with caution and considering long-term fiscal impacts when deciding on tax cuts.

Pages: 21

Widely used by state governments, personal income tax (PIT) is the pillar of states’ revenue system. With a broad tax base, PIT is one of the most productive taxes. Ironically, it is also the most attacked. This chapter first examines PIT reforms in the last decades. The severe revenue shortfalls during and immediately after the Great Recession forced elected officials in various states to expand the tax base and raise the tax rates. When the fiscal pressure receded, the dominant theme of tax cuts returned. Though tax cuts are always politically attractive, lawmakers should carefully consider the impact on state revenue capacity in the short and long terms. This chapter also discusses several issues related to PIT design and the challenges they impose on state revenue stability: tax progressivity, capital gains tax, and tax triggers.

Pages: 23

Abstract Corporate income tax (CIT) is widely used at the state level, yet its share in states’ total tax revenue has generally declined over the years. With the proliferation of tax loopholes and tax incentive programs, CIT has become complicated, controversial, and costly to administer. Interstate competition and technological development add challenges to CIT collection because multi-state and multinational corporations can easily move across the board. In the past decades, CIT has continued to be a target of tax reforms driven by both state fiscal consideration and lawmakers’ political/ideological beliefs. Some reforms aim to hold wealthy and large corporations accountable by ensuring they pay their fair share. Others insist on further tax reduction and even elimination to promote economic growth. This chapter examines how state CIT has changed in the past decades, particularly the tax base changes, and whether it can be reformed to contribute to state fiscal stability in the years to come.

Pages: 25

Like personal income tax, general sales tax also serves as the pillar for state finance, yet its share in total state revenue has shrunk over the decades. While politics always affects tax policies, sales tax presents the best showcase where a new service-based and technology-oriented economy has imposed challenges to a tax system. The U.S. Supreme Court decision regarding states’ jurisdiction over remote sales affects their ability to collect this increasing amount of tax revenue. Still, the economic nexus laws do not solve the root cause for sales tax base erosion—a system established in the manufacturing age applying to personal tangible goods is narrowly construed. This chapter will examine the changes state governments have made with their sales tax in the past decades. Then, it will discuss various issues and challenges related to tax base erosion and how state governments have addressed them and should address them.

Pages: 23

Sin taxes (e.g., tax on tobacco, alcohol, gambling, and marijuana) are imposed on consumptions and activities that are considered harmful to consumers and communities. They serve dual and conflicting goals: to deter people from engaging in sinful activities and to generate revenue for governments. Though their revenue collections constitute a relatively small share of state tax revenue, they are often easy targets for elected officials to generate the needed revenue. This chapter examines state taxes on tobacco, alcohol, and gambling: the tax structures, revenue trends, and the role they play in long-term state fiscal stability. The review shows that though elected officials often increase these taxes as budget fixers during fiscal crises, they should not rely on any of these taxes for long-term budget commitment. Tobacco tax revenue continues to decline largely due to its reliance on consumption. Overall, alcohol tax revenues have increased but are not evenly distributed across the states, and consumption per capita has declined. The increasing gambling options have seen an initial burst of revenue, but they cannibalize the revenue, taking customers away from existing gambling activities and sites. After all, heavy reliance on sin taxes will induce state governments to encourage harmful consumption and activities.

Pages: 14

As of May 2024, 24 states have legalized recreational marijuana. A major rationale is to tax the sales and generate revenues, which is attractive for state and local officials who often struggle to balance their budgets. Marijuana tax is also a sin tax, and its consumption is believed to create negative externalities that need to be addressed. Unlike other sin taxes, marijuana products are not standardized, and the market is still evolving. To better understand how marijuana tax will contribute to state finance, this chapter will first discuss different marijuana tax structures from both revenue stability and equity perspectives, then examine marijuana revenue trends with limited years of data and how the revenue is used.

Pages: 33

This chapter analyzes three revenue sources. They are joined into one chapter because gas taxes and healthcare provider taxes resemble user charges to certain extent. User charges and fees have increased their presence in public finance and have the potential to improve government fiscal stability by releasing fiscal burden from the general fund. Fuel tax revenue has become inadequate for transportation funding. Its tax base has shrunk due to the fixed rate structure, fuel efficiency improvement, and increasing use of electric vehicles. Various efforts have taken place to reform fuel taxes and address transportation funding needs. Healthcare provider taxes have played an important role in non-federal Medicaid funding. Their rates and allocations have far-reaching implications for state healthcare programs and the overall state budgets.

Pages: 15

The unexpectedly favorable financial situations emerging from the pandemic provided a rare opportunity for states to restructure their fiscal system and address their long-term fiscal imbalances. With the robust revenue collection, state lawmakers engaged in a wave of tax relief, including cutting taxes, tax rebates, and a wide range of tax breaks. Will these policies help states build their fiscal stability in the long term? This chapter discusses the state tax policies during the pandemic and assesses the possible impact on state finances. Interestingly, the desire to push for fiscal stability during the Great Recession seems to leave little impact on American tax policies.

Pages: 13

This conclusion chapter recaps the major observations of states’ tax policy changes over the years. It will answer the following questions: Have states’ tax changes improved their fiscal stability and fiscal sustainability? The answers are quite mixed, at best. One key to building a stable and sustainable fiscal system is to have a balanced, diversified, and broad tax base. States still need to achieve this goal. In the end, several recommendations are highlighted to help states move in that direction.