changes in state government finances in the 1980s · 2019. 4. 23. · pects of the changes in state...

CHANGES IN STATE GOVERNMENT FINANCES IN THE 1980s

STEVEN D. GOLD*

ABSTRACT proaches that can help to improve the pol-

This article examines changes in stateicy relevance of research about state-local

revenue and spending in the 1980s, withfinances: (1) disaggregating trends in

particular attention to the period fi-om 1986spending, revenue, and different cate-

to 1989, and discusses likely developmentsgories of government to a greater degree

in the 1990s. It incorporates four ap-than usual; (2) employing fiscal data from

proaches that can help to improve the pol-sources that are often overlooked, partic-

icy relevance of research about state-localularly sources other than the U.S. De-

finances: (1) disaggregating trends inpartment of Commerce; (3) analyzing both

spending, revenue, and different cate-discrete policy actions and changes that

gories of government to a greater degreeoccur automatically because of the dy-

than usual; (2) employing fiscal data fromnamics of the tax or spending system; and

sources that are often overlooked, partic-(4) being sensitive to shifts in trends over

ularly sources other than the U.S. De-time.

partment of Commerce; (3) analyzing bothThe late 1980s were not years of severe

discrete policy actions and changes thatfiscal stress for most states. Thanks to na-

occur automatically because of the dynam-tional economic growth, most states were

ics of the tax or spending system; and (4)able to keep their budgets safely in sur-

being sensitive to shifts in trends over time.plus during this period. At the end of fis-cal year 1989, the sum of balances heldin general funds and budget stabilization

TATE governments are becoming more funds was about $12 billion, more than 4Simportant in the American federal percent of total state spending. While notsystem, assuming expanded responsibili- large enough to provide much of a cush-ties as a result of retrenchment at the ion if the economy deteriorated (as it did),federal level. This trend is likely to con- this is a higher level of reserves than statestinue in the 1990s. Despite their in- had held in any year since 1980. The Newcreased prominence, some important as- England states and several Middle Atlan-pects of the changes in state finances are tic states, however, were exceptions to thisnot widely understood. This article ex- general prosperity, with state financesamines how state revenue and spending weakening along with the decline of eco-changed in the 1980s, with particular at- nomic activity in those regions (Howard).

tention to the period from 1986 to 1989,and discusses likely developments in the1990S., 1. Broad Revenue Trends in the

While the primary focus of this article 1970s and 1980sis on states, some significant changes at Although this article is concerned withthe local level are also noted. Analysis of developments in the 1980s, for historicallocal governments is much more difficult

perspective it is important to consider thethan for states because of the great di- previous decade as well. It is difficult toversity among them and the lack of dataof comparable quality to that used here

generalize about changes since 1970 be-

for states. By concentrating on states cau .se state and local revenue has traced

rather than state-local governments com- a zigzag pattern, rising faster than per-

bined, this article is able to uncover many sonal income through 1977, then falling

important trends and developments. for five years, and then rising again.

This article incorporates several ap- The first three columns of Table 1 sum-marize the fluctuations in total state and

*State University of New York, Albany, NY 12203- local tax revenue relative to personal in-1003. come. The net result of the ups and downs

2 NATIONAL TAX JOURNAL [Vol. XLIV

is that tax revenue per $100 of personal 1950s and 1960s (due in considerableincome in 1989 ($11.56) was about 2 per- measure to the costs of educating babycent higher than in 1970 ($11.32), but still boomers) by greatly increasing their own5 percent lower than in 1977 ($12.15). taxes. Between 1960 and 1971, states

If one compares the periods before and adopted 10 new personal income taxes andafter 1978, trends appear one way; but if nine new sales taxes, and many other1980 is used as a dividing year, they ap- states increased income and sales taxpear differently. Because of these sharp rates. Per $100 of personal income, statefluctuations in revenue in certain pe- and local taxes rose from $9.24 in 1960 toriods, Table 2 shows revenues in four $11.41 in 1971, an extremely robust 23years-1970, 1978, 1980, and 1989. It dis- percent increase.plays not only tax revenue but also

2rev- It makes a big difference whether we

enue from charges and federal aid, for examine only taxes or revenue fromcombined state-local revenue and for state charges as well. Between 1980 and 1989and local revenue separately. state and local tax revenue rose faster than

Between 1970 and 1978, all three cat- personal income, but tax revenue per $100egones of revenue-taxes, federal aid, and of personal income was still more than 4charges-rose faster than personal in- percent lower in 1989 than it had been income.3 But in the next two years, both 1978. But revenue from charges rose fasterfederal aid and taxes per $100 of personal than revenue from taxes, and by 1989 theincome decreased. The year 1978 was piv- sum of revenue from taxes and chargesotal for two reasons. That was the year was within 1 percent of its 1978 level.when Proposition 13 was approved by Federal aid fell precipitously in theCalifornia voters, slashing property taxes 1980s, declining by more than taxes andin that state and touching off a national charges rose. Thus, the sum of all threetax revolt that continued in some form for kinds of revenue in 1989 was slightly lessseveral years. That was also the year when than it had been in 1980 and considerablyPresident Jimmy Carter began the rever- less than in 1978 (more than 7 percentsal of the long-term increase in federal aid lower). Looked at from another perspec-to state and local governments. President tive, we can say that taxes and chargesRonald Reagan, of course, carried that rose nearly enough to offset the decreasepolicy much further. (The peak year for in federal aid after 1980, although itstate-local tax revenue relative to per- should not be inferred that a causal re-sonal income was 1977 rather than 1978. lationship exists.This analysis focuses on 1978 because of The trends for state revenues alone,the dramatic developments that occurred shown in the middle portion of Table 2,then and because it was the highest year reveal some similarities and also somefor state tax revenue and for federal aid differences from those for state and localper $100 of personal income.) governments combined. For state govern-

Although state taxes rose considerably ments, revenue from taxes and chargesmore rapidly than local taxes when the rose less and federal aid held up better1970s and 1980s are viewed as a unit, that than for local governments. In 1989, statewas not true in the 1980s. In fact, local taxes were within 1 percent of their 1978taxes rose faster than state taxes in most level, and the sum of revenue from chargesyears from 1981 to 1989-the only excep- and taxes was slightly above what it hadtions being 1984 and 1985. Per $100 of been in 1978. Total revenue-taxes,personal income, local tax revenue rose 7 charges, and federal aid-was very closepercent and state taxes less than 4 per- to its level of 1980 but still 4 percent lowercent between 1980 and 1989. This is un- than in 1978.usual. The 1950s were the latest previous As noted above, local goverrunents indecade in which the growth of state taxes the 1980s lost much more federal aid thanfell short of the increase in local taxes. states and increased taxes and chargesStates eventually responded to the rapid more. The largest local tax increases, asincrease of local property taxes in the shown in Table 3, have been imposed by

TABLE ISTATE AND LOCAL TAX REVENUE PER $100 OF PERSONAL IN

Fiscal General PersonalYear Total Local State Sales Income

1989 $11.55 $4.55 $7.02 $2.31 $2.20

1988 11.60 4.57 7.05 2.32 2.131987 12.48 4.48 7.02 2.26 2.161986 11.24 4.37 6.89 2.26 2.04

1985 11.28 4.34 6.97 2.25 2.06

1984 11.30 4.35 6.96 2.21 2.091983 10.68 4.25 6.46 2.02 1.88

1982 10.59 4.12 6.49 2.01 1.82

1981 10.85 4.20 6.67 2.07 1.821980 11.02 4.26 6.78 2.14 1.841979 11.37 4.46 6.94 2.19 1.81

1978 12.08 5.01 7.10 2.21 1.821977 12.15 5.17 7.02 2.14 1.771976 11.98 5.17 6.85 2.10 1.65

1975 11.74 5.09 6.68 2.07 1.571974 11.93 5.16 6.81 2.07 1.571973 12.41 5.43 7.01 2.04 1.60

1972 12.24 5.51 6.77 1.99 1.471971 11.50 5.26 6.27 1.88 1.241970 11.32 5.07 6.29 1.86 1.20

Note: Revenue for each fiscal year is divided by personalthat ended during it.

Sources: For tax revenue, U. S. Census Bureau, State GoveD.C.: U.S. Government Printing Office, various years)Department of Commerce, Survey of Current BusinessDepartment of Commerce, Survey of Current Business 68


TABLE 2STATE AND LOCAL GENERAL REVENUE FROM TAXES, CHARGES, AND FEDERAL

AID PER $100 OF PERSONAL INCOME, 1970,1978,1980, AND 1989

Category of Revenue 1970 1978 1980 1989

State-Local

Total $16.11 $18.59 $17.29 $17.24Federal aid 2.85 4.34 4.09 3.10Taxes 11.32 12.08 11.02 11.56Charges 1.94 2.16 2.19 2.58Exhibit: taxes + charges 13.26 14.25 13.20 14.14

State

Total $ 9.60 $11.09 $10.66 $10.66Federal aid 2.52 3.14 3.06 2.68Taxes 6.29 7.10 6.78 7.03Charges 0.80 0.85 0.82 0.95Exhibit: taxes + charges 7.08 7.94 7.60 7.98

Local

Total $ 6.55 $7.54 $6.67 $6.61

Federal aid 0.34 1.21 1.04 0.43Taxes 5.07 5.01 4.26 4.55Charges 1.14 1.32 1.37 1.63Exhibit: taxes + charges 6.21 6.33 5.63 6.18

Sources: U.S. Census Bureau, Governmental Finances(Washington, D.C.: various years); U.S. Department ofCommerce, Survey of Current Business, various years); U.S.ACIR, Significant Features of Fiscal Federalism: 1990, vol.2, pp. 22-23.

county governments, which have sub- tion in health care costs. Another consid-stantial responsibility for social services eration was the Reagan policy of consol-and health programs and suffered the most idating aid into block grants; this involvedfrom federal aid reductions. Tax increases converting many former federal-local pro-by cities and school districts lagged be- grams into federal-state grants, with stateshind. (Special districts had even larger tax distributing funds to localities (Goldincreases than counties, but they started 1990a).from a low level. In 1988, they raised only Table 1 shows that some major changes3.5 percent of local tax revenue.) in state tax structures occurred between

Several factors account for the differ- 1970 and 1989. Viewing the entire 19ence in the path of federal aid for state years as a whole, revenue from both theand local governments in the 1980s. The personal income tax and the general salesmajority of federal aid to states is for wel- tax have risen considerably faster thanfare (especially Medicaid and Aid to Fam- personal income. Although sales tax rev-ilies with Dependent Children) and high- enue did not grow as fast as personal in-ways, programs that were not as come tax revenue, the sales tax remainsvulnerable to federal cutbacks as the the single most productive state tax. Ex-newer aid programs that were estab- cise taxes, which account for most of thelished in the 1960s and 1970s and pro- "othee' category, play a much smaller rolevided aid directly to cities (Ladd 1990a). in state tax structures today than they didIn fact, as discussed below, Medicaid grew in 1970. On the other hand, the corpora-at a high rate, primarily because of inflation income tax is somewhat more prom-

No. 11 STATE GOVERNMENT FINANCES 5

TABLE 3CHANGES IN LOCAL GOVERNMENT REVENUE, 1980 TO 1988

All Counties MunicipalitiesS?hool-Districts

Federal aid -19.0% -46.6% -32.9% -5.0%

State aid 79.1 81.4 76.2 78.1

Taxes 98.6 115.7 91.3 91.5

Property 93.9 107.6 77.6 94.1

Nonproperty 113.7 141.4 107.3 28.1

Total 86.7 94.4 78.6 82.4

Note: Changes in miscellaneous revenue are not shown, norare figures for townships and special districts.

Source: U.S. Census Bureau, Governmental Finances in (year)

inent than it was 20 years ago. in the 1980s is significant. The most im-

Trends in the 1980s were considerably portant factor was a renewed national

different from those of the 1970s. The rise commitment to repair and maintain roadsof the personal income tax was much and bridges, resulting in much stronger

slower, and excise taxes increased much increases in motor fuel taxes than in the

more sharply than in the 1970s. The cor- period before 1983. There were 106 leg-

poration income tax slipped considerably, islative increases in state motor fuel taxes

partially offsetting the increases of the in the 1980s through January, 1989 (The

previous decade. Severance tax collec- Road Improvement Project). These taxes

tions soared and then plunged, following have little automatic revenue growth be-

the trends of oil prices. cause they are usually expressed as a cer-

Just as there is a distinct contrast be- tain number of cents per gallon, and the

tween the 1970s and the 1980s, there is amount of gasoline and diesel fuel pur-

a difference between the early and the late chased is not increasing at a high rate

1980s. Revenue was under pressure in the (Bowman and Mikesell). Nevertheless,

first several years of the decade primarily because of higher tax rates, the revenue

because of the severe recessions that from motor fuel taxes actually rose faster

gripped the economy from 1980 to 1982. between 1983 and 1989 than total state

The first response of most states was to tax revenue, 67.0 percent versus 65.7 per-

cut spending and resort to various gim- cent. This is a dramatic change from the

micks to delay having to confront their previous pattern. Between 1970 and 1983,

fiscal problems. When these actions proved total state tax revenue rose more than

insuticient, in late 1982 and 1983 most three times as fast as revenue from motor

states enacted significant tax increases, fuel taxes.

which (along with the rebounding econ- Other trends also contributed to the ac-

omy) led to a surge in revenue in fiscal celeration of excise tax increases. Resis-

year 1984. After that year, however, rev- tance to increases in cigarette taxes waned,enue was on a plateau, with relatively lit- with 26 increases in 1987, 1988, and 1989.

tle change in revenue per $100 of per- The size of increases also jumped in mag-

sonal income for total revenue or any of nitude, with California leading the way

its major components-personal income with a 25 cent increase and numerous

tax, general sales tax, corporation income other states enacting double-digit in-

tax, and other nonseverance taxes. creases. Higher revenue from insurance

The change in the role of excise taxes premium taxes (especially for health in-


surance) and utility taxes also boosted ex- to realize capital gains before the maxi-cise tax revenue. mum individual tax rate rose from 20

percent to 28 percent in January, 1987.

Il. State Tax Policies, 1987 to 1990 Corporations as well had an incentive torealize capital gains for this reason, and

Changes in revenue over time result many of them apparently also settled dis-from two factors-the income elasticity of puted issues with states faster than nor-each tax, and legislated changes in tax mal because state taxes were more valu-rates and the tax base. The recent period able as deductions before the maximumhas been a particularly interesting one federal tax rate was reduced from 46 per-because of federal tax reform, which raised cent in 1986 to 40 percent in 1987 and 34some important issues for state policy percent in 1988. (State fiscal years aremakers. We shall first discuss the effects numbered by the calendar year in whichof federal tax reform and then the other they end. In all but four states, fiscal yearsfactors. begin July 1.)

Three important qualifications should

Federal ReforM4 be noted about the effect of federal tax re-form on state tax revenue:

When federal tax reform was enacted 1. Table 1 presents data only throughin 1986, the conventional wisdom was that 1989, which is too short a period to drawit would lead to windfall increases in state definitive conclusions about the long runpersonal and corporation income tax rev- impact of federal reform.enue unless states took actions to prevent 2. As discussed below, the effect of fed-this from occurring. These windfalls were eral reform can be measured only whenexpected because the great majority of other influences on state tax revenue, suchstates tie their definitions of adjusted gross as the elasticity of each tax and economicincome and itemized deductions to the changes, are taken into account.federal tax code.' Since federal tax reform 3. National aggregate data obscure somebroadened the federal tax base by repeal- important differences among states. Al-ing deductions and exclusions, state rev- though about 80 percent of the personalenue would increase unless the states re- windfall was reportedly avoided, numer-duced their tax rates or made other ous states did receive part or all of it. In-adjustments as the federal government had cluding responses through 1990, 15 statesdone. retained the entire windfall, seven states

The most widely-cited estimates were kept part of it, and 12 states avoided itthat states would receive a personal in- entirely. There was no windfall in thecome tax windfall of more than $6 billion other states because of the relationshipand a corporate windfall of $3 billion between their state income tax and the(NASBO, 1987). The estimate of the po- federal tax. The big states with the larg-tential personal windfall appears to have est potential gains tended to avoid thebeen fairly accurate, but states acted to windfall completely, however, accountingavoid receiving most of it. The corporate for the national estimate that about four-windfall is a di.fferent story. Only six states fifths was avoided.'reduced their rates to avoid it, but it never Personal Income Tax. The most impor-materialized. tant effect of federal reform on the states

The evidence in Table 1 suggests that was to help bring about a major round offederal tax reform has thus far had a rel- state tax reform (Gold 1988a, Gold 1988b).atively small impact on state personal and These state reforms incorporated many ofcorporate income tax revenue. It did, the same themes as federal reform-low-however, have a transitory impact, with ering tax rates, broadening the tax base,bulges in revenue in fiscal year 1987 af- and relieving taxes on low-income house-ter which revenue receded somewhat. The holds by raising the personal exemptionmajor reason for the spike in revenue in and standard deduction. Here is a silm-fiscal year 1987 was the rush by investors mary of the changes in the four years fol-


lowing federal reform: size for two reasons: (1) The addi-• Eighteen states reduced nominal tax tional revenue at the federal level was

rates; overestimated, (2) The state esti-• Twenty-two states increased the per- mates failed to take proper account of

sonal exemption or personal credit; the relative importance of those pro-• Twenty-three states increased the visions relevant to the states versus

standard deduction, often making it those that did not affect state tax sys-more progressive;7 tems.

• Many states eliminated special de- Corporations responded aggressivelyductions or exclusions not in the fed- to the specter of higher tax liabilityeral code, including four states that through such measures as conversionrepealed their deduction for federal to Subchapter S status, increased re-income tax payments; and liance on debt through leveraged buy-

• Nine Ptates-Arizona, Colorado, Kan- outs, and stricter interpretations ofsas, Maine, Minnesota, Nebraska, New ambiguous tax code provisions.York, North Carolina, and West Vir- Much of the windfall was expected toginia-restructured their entire inresult from complex provisions in-come tax. volving accounting changes. Delays in

These reforms had several important issuance of IRS regulations may haveresults: relieving taxes on the poor (the deferred realization of higher revenuenumber of states exempting the poor from from this source.the state income tax rose from four to 17) In any case, the failure of the corporate(Greenstein and Hutchinson); increasing windfall to materialize confirms the wis-progressivity (both by relieving taxes at dom of state policymakers who reactedthe low end of the income scale and by cautiously to predictions that it would oc-conforming to federal changes that re- cur and turned a deaf ear to corporatemoved the exclusion for capital gains and pleas that states act to avoid windfall rev-eliminated many tax shelters); simplify- enue increases.ing the tax by increasing conformity; andreducing the elasticity of the tax by flat- Dissecting Other Influences on Revenuetening tax rates" (Galper and Pollock; TrendsMazerov and Lav; NASBO and PriceWaterhouse).

I Greater insight into state tax policy isTwo additional points are important to provided by considering the discretionary

make about this wave of state tax reform. changes in tax rates and tax bases en-First, federal reform does not deserve all acted by states in 1987 and the three fol-of the credit for this high level of activity. lowing years. In the aggregate, discre-The receptivity to reform was enhanced tionary state tax increases were $4.5by tax reform studies that about half of billion in 1987, $0.6 billion in 1988, $3.5the states had conducted earlier in the billion in 1989, and $8.6 billion in 1990'1980s. In fact, three states-New Mexico, (Eckl et al). When these actions are re-South Carolina, and Wisconsin-had al- lated to the data on tax revenue in Tableready restructured their income taxes in 1, it is important to consider that tax1985 and 1986. Second, despite the breadth changes generally take effect in the fiscalof the reform movement, numerous states year following the calendar year when theystill have income taxes that have not been were enacted. For example, most tax in-reformed at all or that have enacted only creases enacted in calendar year 1989 tookpartial reforms. effect in fiscal year 1990, which began in

Corporation Income Tax. The reasons July 1989 in 46 states.why the corporate windfall failed to ma- It is difficult to summarize state tax in-terialize are still not fully understood, but creases and decreases because there areseveral considerations are probably in- so many of them, many of which are notvolved (Aten and Gold; New York State): quantitatively important. Table 4 at-

- The original estimates overstated its tempts to overcome these problems by fo-


TABLE 4SUMMARY OF MAJOR STATE TAX CHANGES, 1987 TO 1990

STATE 1990 1989 1988 1987

NEW ENGLANDConne 'tiout UPSCMaine pMassachusetts UPS u PNow Hampshire uRhode Island u s u cVermont p p p

MID-ATLANTICDelawareMarylandNew Jersey UPSNew York c p p pPennsylvania

GREAT LAKESIllinois UPCIndiana UPCMichiganOhioWisconsin p

PLAINSIowaKansas P s uMinnesota uMissouri c uNebraska UPSC p pNorth Dakota p UPSSouth Dakota D S u s

SOUTHEASTAlabamaArkansasFlorida u uGeorgia u sKentucky UPSCLouisiana u sMississippiNorth Carolina cSouth Carolina pTennesseVirginia u s sWest Virginia

SOUTHWESTArizona UPC uNew Mexi o s u sOklahoma UPSC u sTexas s c

ROCKY MOUNTAINColoradoIdaho P CMont na P C u PUtah D p sWyoming

FAR WESTAlaska uCellifom sHawaii is D P pNevadaOregonWashington


TABLE 4 (continued)SUMMARY OF MAJOR STATE TAX CHANGES, 1987 TO 1990

SUMMARY 1990 1989 1988 1987

IncreasesMore than 5 % 9 7 2 10Personal Income 7 5 0 6Corporate Income 5 5 0 3Sales 8 5 2 5

DecreasesMore than 5 % 0 1 2 0Personal Income 0 5 5 2Sales 0 0 1 0

Key to Table:U: increases of at least 5% of total revenueP: personal income tax increaseS: general sales tax increaseC: corporation income tax increaseD: decrease of at least 5% of total revenueP: personal income tax decreaseS: general sales tax decrease

Notes: This table includes both changes in tax rates and significant changes in the tax base, except thatwindfall revenue changes resulting from federal tax reform are not considered. It refers to announcedchanges, even though errors in estimates may have caused the actual changes to differ from what hadbeen intended. Expiration of a temporary increase is treated as a decrease, which explains the onesales tax reduction. There were no corporation income tax reductions, excluding states that reducedtax rates to partially or completely avoid receiving a windfall. Tax increases enacted in North Dakotabut rejected by voters are not included.

cusing just on the three major state poration income tax). Thus, subtractingtaxes-the general sales tax, the personal the decreases from the increases, thereincome tax, and the corporation income were 15 net sales tax increases and onlytax. It also identifies states that raised or six net income tax increases, implying alowered total tax revenue by at least 5 preference for relying on the sales taxpercent in a single year through discre- rather than the income tax when addi-tionary changes. tional revenue was needed during this pe-

There has been a preponderance of in- riod.creases, with 23 states enacting 5 percent This conclusion needs to be modified byincreases and only three states having 5 considering the revenue growth that au-percent decreases. Increases predomi- tomatically occurs because of the incomenated in three of the four years, with 1988 elasticity of taxes. Because the personalbeing the exception. Only four states income tax has a considerably higher in-changed their tax revenue by as much as come elasticity than the sales tax, its rev-5 percent in 1988, two with increases and enue has risen about in line with that oftwo with decreases. the sales tax despite the fact that states

The number of sales tax increases was raised sales tax rates more frequently thansomewhat higher than the number of per- income tax rates. Put another way, somesonal income tax increases between 1987 of the income tax cuts merely offset theand 1990, 16 versus 12. There were also tendency of the high income elasticity of13 corporation income tax increases. The the personal income tax to cause its ef-more significant contrast relates to the fective tax rate to increase over time.pattern of decreases. Six states had per- No recent comprehensive data aresonal income tax decreases but only one available on elasticities of the various statecut its sales tax (and none reduced its cor- taxes, but fragmentary information is

io NATIONAL TAX JOURNAL [Vol. XLIV

suggestive. The U.S. Treasury Depart- income tax states tending to avoid thement (1986), following a survey of pre- windfall and low income tax states re-vious research (Aten, 1986), concluded that taining it (Gold: 1991b).the best national estimates were 1.4 for What has been the effect of federal taxthe personal income tax, 1.1 for the sales reform on the composition of state taxtax, 0.6 for selective sales taxes, and 0.9 revenue? Thus far, it seems to have beenfor other state and local own-source rev- relatively limited. Not many states haveenues. More recent studies suggest that shifted away from the sales tax becausestate responses to federal tax reform have it is no longer deductible, nor has reliancesomewhat reduced the elasticity of the in- on the income tax decreased in responsecome tax, and its elasticity tends to de- to the reduced value of federal deduct-crease over time because an increasing ibility for high-income taxpayers as a re-proportion of taxpayers reaches the high- sult of lower federal marginal tax rates.est tax bracket. Moreover, 15 of the 40 Federal tax reform contributed to thestates with income taxes now index at least flattening of nominal state income taxsome features of the tax for inflation. rates, but on balance effective income tax

The elasticity of the sales tax depends rates became more progressive because ofheavily on its coverage, particularly base broadening resulting from full tax-whether it extends to many services. It ation of capital gains and elimination ofappears that many state sales taxes with tax shelters, and tax relief for low-incomenarrow taxation of services have an in- households (Mazerov and Lav; Galper andcome elasticity below 1.0.1' Pollock).

The Treasury's elasticity estimates ap-pear to be too high under present condi-

111. Spendingtions because tax bases have been erodedby economic changes like the growth of State spending has been growing ratherthe service sector and the increasing im- strongly. As reported by the National As-portance of retirement income (which is sociation of State Budget Officers (How-often exempted or taxed at a lower rate ard), real general fund spending rose 2.6than wages and salaries). Considering that percent in 1987, 2.9 percent in 1988, 3.5state discretionary actions have on bal- percent in 1989, and 2.6 percent in 1990.ance raised revenue since 1987, the Trea- Data from the National Income and Prod-sury's estimates appear inconsistent with uct Accounts portray a similar picture.the failure of state personal income and Such large spending increases appeargeneral sales tax revenue to grow much inconsistent with predictions by severalfaster than personal income. analysts that federal tax reform would

Decisions to increase or reduce reliance depress state spending, most importantlyon the income tax have not been random. because federal marginal tax rate reduc-If one examines changes in income tax tions and elimination of sales tax deduct-rates, there is a clear pattern of conver- ibility implied that the implicit price ofgence. The states with relatively high in- state-local services would increase consid-come tax rates tended to lower them, and erably." Those predictions, of course, as-increases have occurred mainly in states sumed that "other things would remainwith relatively low income tax rates. equal." It could be that exogenous influ-Among the states with the highest mar- ences have pushed up spending to such aginal tax rates in 1980 were California, degree that they have obscured the de-Delaware, Hawaii, Minnesota, New York, pressing effect of federal reform.Oregon, and Wisconsin. All significantly Insight into the forces driving up statelowered their tax rates by 1990. On the spending may be obtained by examiningother hand, increases occurred in states its main components. Table 5 shows statesuch as Arizona, Indiana, and New Jersey spending per $100 of personal income fromwith relatively low rates. Decisions to re- 1976 to 1989. Because the intent in pre-tain or avoid the windfall from federal re- paring the table was to focus on spendingforiu followed a similar pattern, with high paid for by taxes, the figures shown ex-

TABLE 5STATE SPENDING PER $100 OF PERSONAL INCOME EXCLUDING SPENDING PAID

CHARGES 1976 TO 1989

Higher Elea-see Other HealthYear Total Education Education Medicaid Welfare Hospital

1989 $7.80 $0.91 $2.30 $0.61 $0.40 $0.631988 7.91 0.91 2.32 0.60 0.37 0.621987 7.86 0.92 2.33 0.56 0.39 0.611986 7.67 0.93 2.30 0.55 0.38 0.611985 7.55 0.92 2.23 0.55 0.38 0.591984 7.37 0.90 2.18 0.56 0.41 0.571983 7.27 0.90 2.17 0.56 0.36 0.591982 7.28 0.91 2.18 0.51 0.44 0.601981 7.43 0.93 2.29 0.49 0.51 0.621980 7.41 0.94 2.37 0.45 0.51 0.601979 7.28 0.94 2.31 0.41 0.51 0.581978 7.27 0.97 2.28 0.38 0.61 0.591977 7.49 0.96 2.29 0.38 0.60 0.611976 7.68 0.97 2.35 0.33 0.68 0.60

Source: Unless otherwise noted, U.S. Census Bureau, State Govefor higher education, Center for Higher Education,Grapevine; for elementary-secondary education, NatioEstimates of School Statistics (annual); for f4edicaid,Administration.


clude spending financed by federal aid and result of deinstitutionalization.user charges. It was not, however, possi- Highway spending has risen consid-ble to exclude all spending except for that erably since 1984, but recent in-paid for by taxes, so the table includes a creases do not fully offset low spend-considerable amount of other spending, ing in the late 1970s and early 1980s.such as outlays paid for by miscellaneous Although comparing spending to per-revenue and from borrowing." sonal income is a useful way of analyzing

Some important trends are apparent in changes over time, it is also appropriatestate spending patterns:- to use some other perspectives in analyz-

• Medicaid and corrections have been ing particular types of spending. For ex-growing much faster than other parts ample, real per pupil state spending forof the budget. Their increases have elementary-secondary education rose 22restricted the amount of revenue that percent between 1983 and 1988, and realcould be spent on other programs. spending per full-time-equivalent student

• Non-Medicaid welfare spending (e.g., in higher education increased 12 percent.Aid to Families with Dependent Chil- These increases appear somewhat moredren, other income maintenance pro- impressive than the changes in spendinggrams, and services for the poor) has relative to personal income (Gold 1990b:been the slowest growing part of state 15).budgets. It fell sharply relative to Medicaid and corrections merit specialpersonal income and total state attention because of their dynamic ratesspending through 1983 and has grown of increase. The most important forceabout in line with personal income driving up Medicaid spending during thissince then. The decrease occurred both period was inflation in health care costs.in income maintenance and in other Despite strenuous state and federal ef-programs. forts to contain the growth of Medicaid

• Elementary-secondary education is by costs, the high rate of price increase forfar the largest component of state medical services (twice the general infla-budgets. School spending has risen tion rate) kept Medicaid growing fastersince 1983, when A Nation at Risk was than other state spending (Chang andpublished highlighting the deficien- Holahan; Holahan and Cohen). Federalcies of schools, but its increase rela- mandates to expand coverage to addi-tive to personal income has not been tional services and more people have addeddramatic. to Medicaid spending increases. The

• Public higher education spending has growth of Medicaid outlays appears to begrown somewhat less rapidly than accelerating, with a reported increase ofpersonal income. It does not appear to 18 percent in fiscal 1990 (Eckl et al).have benefited from the linkage be- The impact of federal mandates is highlytween higher education and economic uneven, with relatively small effects indevelopment that was widely dis- states that had previously elected to pro-cussed in the 1980s. One important vide optional services and major effects inresult of the slow growth of appropri- states providing the bare minimum re-ations for higher education has been quired by the Medicaid program. Low-in-increased reliance on tuition. A major come states in the Southeast have beenshift occurred in about 1983; before among those hardest hit by the mandates.then, appropriations increases tended Corrections spending rose even fasterto exceed tuition increases, but the than Medicaid in the 1980s, as prisonopposite pattern has prevailed since populations mushroomed. The main causethen (Wittstruck and Bragg). of higher corrections spending was not a

• Health and hospital spending has crime wave. In fact, the crime rate fellgrown about in line with personal in- sharply between 1980 and 1984 beforecome. This reflects rapid growth in rising through 1988. The number of crimeshealth spending offset by relatively per 100,000 population was 5,664 in 1988,slow growth in hospital spending as a considerably lower than its 1980 level,


5,950. Demographic changes helped to through aid fell in the 1980s, reducing thekeep the crime rate moderate in the 1980s, apparent increase in state aid to locali-since there was a sharp decrease in the ties.number of males between the ages of 16 The second reason for the difference be-and 24, the cohort that has the highest tween Census and NASBO data is the as-propensity to commit crimes. This de- sumption of local functions by states. Whencrease reflected the small number of births a state takes over a function, any aid thatin the period following the baby boom it previously provided disappears, and its(Gold 1990b: 78-79). spending is counted as state spending, not

The main reason for the boom in cor- assistance to local governments. NASBOrections spending was the national trend identified 18 states that had assumed lo-to "get tough" on criminals, imposing more cal programs between 1982 and 1987, mostand longer sentences. This policy has ma- often in the area of the courts.jor spending implications, since the av- Both Census and NASBO data areerage cost to construct a prison cell is at needed to adequately describe trends inleast $50,000 and the average cost of state aid. While NASBO data are pref-maintaining a prisoner is $25,000 per year. erable because of the two adjustmentsAnother factor driving up spending was discussed above, they are available onlycourt orders to relieve overcrowding and for selected years, and the reportingimprove conditions in other respects. As methodology used in various states is notof January 1990, more than three-fourths as consistent as in Census reports (Ladd:of the states were under court order or 1990b).consent decree to make such improve-ments, and the tally was similar through

IV. Outlook for the First Half of themuch of the 1980s.19908State aid to local goverrunents assumed

increasing importance in the 1980s as the The most likely prospect is that statefederal government reduced its financial and local tax revenue will continue to growsupport for localities. For example, in 1978, faster than personal income, pushed upmunicipalities received $0.84 of state aid by pressures for increased spending. Statefor every dollar of federal aid (excluding and local governments will experienceaid for welfare and education programs, considerable fiscal stress. Although spacewhich are not municipal functions in most does not permit a full discussion of thestates). By 1988, municipalities received nature of this fiscal stress, some of its ma-$2.75 of such state aid for every dollar of jor sources can be noted here:"federal aid (Peterson). Economic growth is likely to be slower

Considerable care is needed in analyz- than it has been since the economying trends in state aid for several reasons. emerged from the last recession inAs reported by the U.S. Census Bureau, 1983. This is due both to the likelybetween 1980 and 1989 state aid rose 96.4 slow growth of the labor force and topercent, which is less than the growth of the existence of much less unem-total state general spending (105.6 per- ployed productive capacity than therecent) or local direct general spending was in 1983.(103.7 percent). The National Association Intergovernmental competition forof State Budget Officers (1989) has re- economic development is likely to in-ported, however, that between 1982 and tensify, in part because of the slowing1987 state aid rose more than total state of economic growth. States where thespending, although the opposite pattern economic growth rate is below aver-was indicated by Census Bureau data. The age are more likely to have contract-major reason for the difference is that ing economies when the nationalCensus data count as state aid money that equilibrium growth rate is slower. 14

states receive from the federal govern- A contracting economy is a powerfultnent to be passed through to local gov- spur to competitive action.ernments; the amount of such pass- Federal mandates will add to spend-


ing increases, but federal aid is not pressive evidence of the virulence of thelikely to keep pace. Federal tax tax revolt backlash in that state, wherechanges, curtailing the deductibility large increases in both the personal in-of state and local taxes and increas- come and general sales taxes had beening excise taxes, will also have ad- enacted. A further test of voter toleranceverse effects. for tax increases is likely in 1992 if, as

. The aging of the population will add the author expects, widespread state taxto the costs of Medicaid and health increases are enacted in 1991 legislativeservices for retired employees. A par- sessions.ticularly rapid increase is projected in Much depends on how skillfully electedthe age group 75 years and older, officials explain the need for tax in-which accounts for a high proportion creases. With the two biggest causes ofof long-term care costs. higher taxes being increased spending for

- School enrollment will increase mod- Medicaid and corrections, tax increaseserately (7.5 percent over the decade), could be hard to sell to middle- and high-according to the National Center for income voters. Unless an effective edu-Education Statistics, considerably cational campaign is launched, they mayfaster than it did in the 1980s. not see any improvement in service levels

- Court decisions are likely to have ad- commensurate with the higher taxes theyverse budget impacts. State courts may are paying. The direct beneficiaries of

j become considerably more active in Medicaid are the poor, and the connectionrequiring reform of school finance. between the drug war and higher taxesAfter a lull for a number of years, may not be appreciated.three state supreme courts (Ken- In view of the fiscal pressures on states,tucky, New Jersey, and Texas) forced it will be important for states to reformmajor tax increases to reduce educa- their tax policies, spending practices, andtional disparities in 1989 and 1990. state-local programs. Tax reform could

*Medical care prices will continue to raise the elasticity and increase the sta-increase rapidly. bility of tax systems, streamline taxes, and

. AIDS and the drug war will be more reduce the distortions caused by high taxexpensive. The National Council on rates. Reform of spending practices couldCrime and Delinquency, for example, increase the efficiency of programs andprojects a 68 percent increase in prison thereby reduce the need for tax increases.populations in 12 states between 1989 Reform of state-local policies could helpand 1994, with the trend toward im- local governments to cope with the era ofprisoning drug offenders being a ma- fend-for-yourself federalism without re-jor contributor (Austin and McVey). quiring big new infusions of state dollars,

Most of the above-mentioned pressures which are unlikely to be available. In-for higher spending are not the result of creased reliance on market mechanisms,service enhancements. If higher levels of enhanced attention to accountability, andservice are sought, for example, to expand targeting are three themes that could helpearly childhood education programs or in- to shape these reforms. Considerable ex-crease teacher salaries, that will add to perimentation is already occurring alongprospective tax increases, these lines, but it needs to be carried much

A major question is the willingness of further (Gold 1990b: ch. 4); Gold (1991a).taxpayers to pay the higher taxes that ap- Here are a few illustrations of the kindspear likely. The first test of this occurred of spending and intergovernmental re-in November 1990, when tax protest ini- forms that are envisioned:tiatives appeared on the ballot in seven Market mechanisms: Decentralizingstates. Although all but one of these pro- programs (including greater relianceposals was defeated, many of them had on community-based mental healthconsiderable support. Moreover, the un- and community corrections pro-expectedly narrow reelection of Senator grams); reducing state mandates thatBill Bradley in New Jersey provided im- increase local costs; privatization;


school choice; and vouchers (e.g. for tion of the 1990 elections. The perceivedday care programs). anti-tax mood will probably result in more

• Accountability: Removing incentives budget cutting and less tax increasing infrom local aid programs that artifi- 1991 than appeared likely before Novem-cially stimulate spending; document- ber, 1990. Whether this stronger aversioning results of programs, and reallo- to tax increases is related to federal taxcating resources based on those results; reform is conjectural, as is the reaction ofand requiring that funds be provided citizens faced with the unpleasant choicewhen new programs are initiated between reduced services and higher taxes.(thereby increasing awareness of pro-gram costs). V. Implications for Public Finance

• Targeting: Replacing general revenue Researchsharing programs that provide equal The approach to analysis of state andper capita aid with aid that is tar- local finances incorporated in this articlegeted based on need-capacity gaps; has a number of important implicationsreducing subsidies for higher educa- that could help to improve the policy rel-tion students who can afford in- evance of academic research about statecreased tuition; phasing out tax pref- and local governments. Significant themeserences at high income levels; and are (1) disaggregating trends in spending,increasing salaries for teachers who revenue, and different categories of gov-are just beginning their careers and emment to a greater degree than usual;for those who demonstrate excellent (2) employing fiscal data from sources thatperformance. are often overlooked, particularly sources

Important tax reforms include mea- other than the U.S. Department of Com-sures to broaden tax bases (particularly merce; (3) analyzing discrete policy ac-to consumer services and retirement in- tions apart from changes that occur au-come, for the sales and income taxes, re- tomatically because of the dynamics of thespectively); increase the elasticity of the tax or spending system; and (4) being sen-tax system where it is very low; provide sitive to shifts in trends over time. Theseexpanded revenue options to local govern- themes are interrelated.ments; and relieve taxes on the poor. Dissaggregation is important in a num-

An issue of considerable interest to ber of respects, for example:public finance theorists is the effects of To understand recent trends in statefederal tax reform. As discussed above, an spending, it is crucial that changes ininitial reading of the data leads one to Medicaid and corrections be analyzed.conclude that through 1990 the impact of Likewise, it is necessary to separatefederal reform has been less than many Medicaid from other welfare spendingtheorists predicted, with no perceptible because their growth rates have beendepressing effect on spending and little substantially different.impact on the relative reliance on differ- To understand developments at theent revenue sources. This small initial local level, it is important to recog-impact is not surprising since the signif- nize the increasing importance oficant effects of federal reform on incen- counties in raising taxes and provid-tives probably required several years to ing services.be considered by state officials. If, how- To understand how revenue is chang-ever, impacts of federal reform do not ap- ing, it is vital to consider charges andpear soon, it will have a serious adverse miscellaneous revenue separately.implication for the realism and predictive To understand the diversity of thePower of numerous economic analyses of federal system, it is necessary to con-the state and local public sector. sider differences among individual

Perhaps coincidentally, the prediction states.that tax reform would depress spending For many purposes examining aggre-could appear to be confirmed as a result gate state and local data severely limitsof governors' and legislators' interpreta- a researcher's ability to explain the re-


sults of policies." This is even more true organizations have their own seriousfor National Income and Product Ac- limitations, such as dependence oncounts data than for Census data because each state's varying definition of whatNIPA follow certain procedures necessary is included in the general fund and thefor their use in macroeconomic analyses failure of most states to report ac-even though they are not relevant for other cording to Generally Accepted Ac-uses. counting Principles.

Despite the emphasis placed here on Analyzing discrete policy changes en-disaggregation, this article is itself sub- tails using information about legislatedject to criticism for insufficiently disag- changes in tax rates or tax bases alonggregating data. For example, little of the with data on tax revenue and elasticityanalysis has considered states individ- estimates. Examples of difficulties thatually." If the discussion had been more have arisen because such information wasdisaggregated, however, space limitations not used:would have required the elimination of Observing that numerous states cutsome of the topics covered. their income tax rates in 1984 and

U.S. Commerce Department data are 1985, some commentators suggestedindispensable for many types of analysis, that states were reducing reliance onbut they are inadequate for answering the income tax, even though to somemany questions. Researchers should con- extent those actions were simply off-sider alternatives when they are avail- setting some of the growth due to theable. Examples: high elasticity of the income tax.

- The Census Bureau does not report Analyzing changes in revenue with-Medicaid data, but they can be ob- out adjusting for changes in tax rates,tained from the U.S. Health Care Fi- bases, or collection schedules resultsnancing Authority. in misspecification of structural eco-

- Census data on higher education nomic relationships.spending include not only state ap- Failure to consider legislative actionspropriations but also outlays financed makes it more difficult to analyze howby tuition, federal aid, and auxiliary states responded to federal tax re-enterprises. For analyzing state sup- form. Focusing solely on changes inport of colleges and universities, data revenue without considering changespublished by the Center for Higher in tax rates is unlikely to explain fullyEducation at Illinois State University how states reacted.18are far superior.'7 Failure to identify important recent de-Census data on state aid to local gov- velopments that are at variance witherriiments are somewhat misleading longer term trends can be seriously mis-because they do not take account of leading. Examples:state takeovers of local functions or Although state tax revenue has risenchanges in federal aid that is passed considerably faster than local tax rev-through to localities. NASBO data are enue over the long run, the oppositebetter in this respect. has been true since 1982. Fending forBalances in state general funds and themselves, local governments raisedbudget stabilization flmds, reported by their taxes slightly faster than stateNASBO and the National Conference taxes increased, even though stateof State Legislatures, are better in- taxes have a considerably higherdicators of state fiscal conditions than elasticity.changes in the surplus or deficit in the Although motor fuel taxes rose muchNational Income and Product Ac- slower than total state tax revenue incounts (Gold 1986). For fiscal 1989, e 1970s, er 1983 ey rose aster,these measures gave opposite indica- as the country became more serioustions, with NIPA showing large defi- about fixing up neglected streets,cits and the states reporting substan- highways, and bridges.tial surpluses. The data from the state Although personal income tax reve-


nue rose considerably faster than 3An exception to the general pattern was local taxes,

general sales tax revenue for the en- which rose slightly slower than personal income be-

tire period from 1970 to 1989, after tween 1970 and 1978,4Federal tax reform also had important impacts on

1984 revenue from sales taxes kept municipal bonds. It reduced demand in several wayspace with personal income tax reve- (e.g., reducing the federal marginal tax rate, repeal-

nue. ing the 80 percent deduction that commercial banks

Economists need to develop more de- formerly could take for the interest they paid in buy-ing municipals on margin, and making private activ-

tailed models to explain state decisions tO ity bonds subject to the alternative minimum tax) andspend and tax. For spending, a priority also reduced supply (e.g., through arbitrage restric-

area should be explaining the growth of ti- and a cap on the volume of private activity bon&).

spending in the aggregate and for majorThese changes tended to make municipal bonds lessattractive vehicles for states to use as a policy in-

programs, measuring the impact of higher tment.corrections and Medicaid spending on other 5 The only states that do not conform to either fed-

parts of the budget, such as education. For eral AGI or taxable income, or base their tax on fed-

teral tax liability, are Alabama, Arkansas, New Jer-

taxation, a priority is to explain explicisey, Pennsylvania, and Mississippi. Most of the states

decisions to change income and sales tax tied to AGI also conform to the great majority of item-rates, making it possible to gain better ized deductions. At the time of federal tax reform,

understanding of whether behavior has North Carolina also did not conform to federal pro-

changed in the past two decades. visions, but it does now as a result of a recent reform(ACIR 1990).

The four themes discussed here point 61987 actions are summarized in Gold et al (1987),

the way toward improving the policy rel- with updates in later editions of State Budget Actions.

evance of research on state and local gov- See particularly Appendix C of the 1988 report. The

ernments. With state and local govern- tally reported in this article differs from that reportedin 1988 because of subsequent actions in Arizona,

ments playing an expanding role in our Connecticut, and Kentucky to retain the -indfall andfederal system, such research ought to be in Kansas and Utah to avoid it entirely The main

a high priority for those concerned about reasons why some states had no windfalls are either

the provision of domestic services. that their income tax (1) was based on federal tax li-ability (which decreased), or (2) did not conform at allto the federal tax code.

7 Progressivity was increased by following the fed-ENDNOTES eral shift away from making the standard deduction

a percentage of AGI and instead making it a flatThe author appreciates helpful comments on an amount.

earlier draft of this article by Robert Aten, Roy Bahl, 8Arizona's 1990 tax reform moved in the oppositeDaphne Kenyon, Nonna Noto, and Frans Seastrand direction, increasing the elasticity of the income taxand financial support provided by the Henry Luce by raising the nominal rate progression and by re-Foundation. pealing indexation.

'This article extends a series of studies on state fi- 'These figures differ somewhat from those pub-nances by the author, each of which provides fuller lished by NASBO because of conceptual differences.discussions of earlier periods. See Gold (1983), Gold For example, NASBO in 1990 included revenue re-(1987a), and Gold (1990a). sulting from a voter-approved referendum to raise

'This analysis omits one other component of state- gasoline taxes, which was not included by NCSL. The

local tax revenue reported by the U.S. Census Bu- figures from NCSL are available for a longer periodreau-miscellaneous revenue. In 1988, for state gov- with a more consistent methodology. The figure for-ments, miscellaneous revenue was $1.06 per $100 tax increases in 1990 is inconsistent with earlier NCSLof Personal income, substantially more than in 1970 methodology in that it counts only revenue received($0,45), 1978 ($0.55), and 1980 ($0.77) Most of this in fiscal 1991; previously, revenue for permanent taxincrease is accounted for by interest receipts, which changes in effect for only part of the fiscal year wasrepresented 58 percent of miscellaneous revenue in annualized. In addition, both NCSL and NASBO in1988; these rose from $0.19 in 1970 to $0.61 per $100 1990 included California's revenue gain fi-om con-OfPersonal income in 1988. This huge increase in in- forming to federal tax changes; NCSL did not previ-terest earnings has been paralleled by a similar in- ously include such revenue, except in the "windfall"aftse in interest paid out. Because much of the growth year 1987. For estimates of net tm changes annuallyOf interest revenue probably is related to arbitrage from 1963 to 1983, see Gold (1984: 14).activity, private activity municipal bonds, and pro_ 1OAten (1990) used lower elasticity estimates-1.3grams that subsidize home mortgages, it greatly ex- for the income tax and 1.0 for the sales tax-in hisaggerates the revenue available for operating general most recent projections of state and local revenue.state programs. Table 1 also omits intergovernmental Several state revenue forecasters have inforraed thePayments from states to local governments, which are author that they estimate the elasticity of the salesa relatively small amount ($0.20 per $100 of personal tax to be about 0.9.income in 1988)@ "See, e.g., Feldstein and Metcalf (1987) and Re-


schovsky and Chemick (1989). Gramlich and Courant Spending in the 1980s: The Access-Cost Trade-off(1991) noted the contrast between their predictions Revisited. Washington, D.C.: The Urban Institute.and actual developments, but they in their own anal- Eckl, Corina L., et al (1990). State Budget and Taxysis had data for only a brief period after reform took Actions in 1990. Denver: National Conference ofeffect. State Legislatures.

12'Me figures for total spending and "other" spend- Feldstein, Martin and G. Metcalf (1987). "The Effecting tend to overstate net spending increases through of Federal Deductibility on State and Local Taxes1989 because they include very large increases in in- and Spending," Journal of Political Economy (Au-terest payments, which were paralleled by large in- gust)- 710-736.creases in interest revenue (as discussed in endnote Galper, Harvey and Stephen H. Pollock (1988). 'Models2). In 1989, 49 percent of long-term state general debt of State Income Tax Reform," in Steven D. Gold,was classified as '@)ublic debt for private purposes." ed , The Unfinished Agenda for State Tax Reform.Even excluding interest payments, "other" spending Denver: National Conference of State Legislatures.had a large increase that is not explainable with Gold, Steven D. (1991a). "The State Fiscal Agenda foravailable information. The principal value of Table 5 the 1990s," Proceedings of the Eighty-third Annualis its depiction of how specific components of spending Conference 1990. Columbus: National Tax Associ-have changed over time, rather than how it indicates ation.total spending has changed. - (1991b). "Interstate Competition and State In-

A complete analysis of the effects of federal tax re- come Taxes," in Daphne Kenyon and John Kincaid,form would have to consider changes in local spend- eds. Competition among State and Local Govern-ing as well as state spending. Data on local spending ments. Washington, D.C.: Urban Institute Press.(comparable to the data on state spending used in this - (1990a). "State Finances in the New Era ofarticle) are more difficult to obtain. As discussed in Fiscal Federalism," in T. R. Swartz and J. E. Peck,the text, there is also a need for a detailed statistical eds., The Changing Face of Fiscal Federalism. Newmodel that quantifies the major influences on state York: M. E. Sharp.spending. (1990b). The State Fiscal Agenda for the 1990s.

"For a fuller discussion, see Gold (1990b: ch. 2) and Denver: National Conference of State Legislatures.Gold (1991a). (1988a). "The Blizzard of 1987: A Year of State

"'For example, if national economic growth is 3 Tax Reform Activity in the States," Publius 18percent, a state that is 2 percentage points below av- (Sumnier) 17-36.erage will grow at a 1 percent rate. If national eco- - (1988b). "The Budding Revolution in State In-nomic growth is 1.5 percent, such a state would have come Taxes," Proceedings of the Eightieth Annualnefiative growth. Conference 1987. Columbus: National Tax Associ-

The need for disaggregation among governments ation.was emphasized by Inman (1979: 273), but it also ap- - (1987a). "Developments in State Finances, 1983plies to disaggregating spending programs and reve- to 1986," Public Budgeting and Finance (Spring).nue sources. (1987b). "The State Government Response to

"For a discussion of how many of the trends dis- Federal Tax Reform: Indications from the Statescussed here vary among states, see Gold and Zelio That Completed Their Work Early," National Tax(1990) and Bahl (1990). Journal (September).

"The Center publishes a monthly report, The - (1986). "State Government Fund Balances, Fi-Grapevine, describing state appropriations for higher nancial Assets, and Measures of Budget Surplus,"education. in U.S. Department of the Treasury, Federal-State-

'8Gramlich and Courant (1991) provide an example Local Fiscal Relations, Technical Papers, vol. U.of such an incomplete analysis. Washington, D.C.: U.S. Government Printing Of-

fice, pp. 593-662..(1984). "State Tax Increases of 1983: Prelude

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