Technological Change and Tax Policy: The Future of State and Local Tax Structures

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As the economy shifts from goods to services and electronic commerce becomes a significant force in the economy, state and local taxing bodies are confronted with new challenges and questions.

Editor's note: The report "Is the New Global Economy Leaving State-Local Tax Structures Behind?" was prepared by the National League of Cities, the National Conference of State Legislatures, and the National Governors Association. Sections of the report and executive summary are reprinted and adapted with permission.

Prominent economic, social, demographic, and technological trends are threatening to erode the tax revenues of states and cities. The mainstays of these tax systems are the income, property, and sales taxes. Together, they generated 75.9 percent of total state and local tax revenues in FY 1994. Each is a prominent revenue source for state and local governments: the property tax generated 31.5 percent, the sales tax generated 23.8 percent, and the personal income tax generated 20.6 percent of total state-local tax revenues in FY 1994.

The most significant fiscal trend over the past 20 years has been the declining share of federal support to state and local governments, which has placed a much greater burden on current state and local taxes. Federal grants-in-aid to state and local governments averaged 21.5 percent of their total spending over the 1990-95 period. This is well below the 26.5 percent peak that occurred in 1978. Consequently, state and local governments have had to rely much more on their own tax revenue sources to generate sufficient revenue to provide services required by the public. Further, the recent trend of Congress pushing more responsibilities to state and local governments will place additional burdens on the current state-local tax structure.

If these two trends were to continue, federal grants-in-aid support to state and local governments would remain at modest levels for some time, and burdens would increase as well. That prospect increases the importance to state and local leaders of maintaining a state-local tax structure that will continue to generate adequate revenues with which to support valuable public services. The continued effectiveness of the tax structure is essential to maintain the autonomy of state and local governments. State and local leaders concerned with the independence and responsiveness of their governments should be sensitive to the stability of the state-local tax structure. The major vulnerability of the …