Measuring Fiscal Disparities Across the U.S. States: A Representative Revenue System/Representative Expenditure System Approach, Fiscal Year 2002

99 Pages Posted: 10 Nov 2011  

Yesim Yilmaz

District of Columbia Office of Revenue Analysis

Sonya Hoo

The Urban Institute

Matthew Nagowski

Federal Reserve Bank of Boston - New England Public Policy Center

Kim S. Rueben

Tax Policy Center

Robert Tannenwald

Federal Reserve Bank of Boston

Date Written: November 1, 2006

Abstract

States and their local governments vary both in their needs to provide basic public services and in their abilities to raise revenues to pay for those services. A joint study by the Tax Policy Center and the New England Policy Center at the Federal Reserve Bank of Boston uses the Representative Revenue System (RRS) and the Representative Expenditure System (RES) frameworks to quantify these disparities across states by comparing each state’s revenue capacity, revenue effort, and necessary expenditures to the average capacity, effort, and need in states across the country for fiscal year 2002.

The fiscal capacity of a state is the state’s revenue capacity relative to its expenditure need. A state with low fiscal capacity has a relatively small revenue base, a relatively high need for expenditures, or — as is often the case — a combination of both.

The New England and Mid-Atlantic states tend to have high revenue capacity and low expenditure needs compared to the national average. Thus, states in these two regions tend to have high fiscal capacity, or a relatively high capability to cover their expenditure needs using own resources. South Central states, on the other hand, have low fiscal capacity — that is, a low level of revenue-raising capacity given what it would cost to provide a standard set of public services to their citizens.

Little relation exists between the amount of federal aid received by states and their fiscal capacity; federal money is not primarily distributed to offset differences in the ability to raise revenues or provide services. Given the current level of federal funds allocated to state and local governments, 91 percent of the gap between revenue capacity and expenditure need across the states could be covered if federal funds were reallocated.

Keywords: New England, Public Policy, State and Local Government Taxation, State and Local Government Expenditures, Interjurisdictional Differences

JEL Classification: H71, H72, H73

Suggested Citation

Yilmaz, Yesim and Hoo, Sonya and Nagowski, Matthew and Rueben, Kim S. and Tannenwald, Robert, Measuring Fiscal Disparities Across the U.S. States: A Representative Revenue System/Representative Expenditure System Approach, Fiscal Year 2002 (November 1, 2006). FRB of Boston Public Policy Discussion Paper . Available at SSRN: https://ssrn.com/abstract=1957339 or http://dx.doi.org/10.2139/ssrn.1957339

Yesim Yilmaz (Contact Author)

District of Columbia Office of Revenue Analysis ( email )

441 4th St. NW Suite 410 South
Washington, DC 20001
United States

Sonya Hoo

The Urban Institute ( email )

2100 M Street, NW
Washington, DC 20037
United States

Matthew Nagowski

Federal Reserve Bank of Boston - New England Public Policy Center

600 Atlantic Avenue
Boston, MA 02210
United States

Kim S. Rueben

Tax Policy Center ( email )

Urban Institute
2100 M Street NW
Washington, DC 20009
United States

Robert Tannenwald

Federal Reserve Bank of Boston ( email )

600 Atlantic Ave.
P.O. Box 2076
Boston, MA 02106
United States
617-973-3093 (Phone)
617-973-3957 (Fax)

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