Fiscal Disparity among the States Revisited

By Tannenwald, Robert | New England Economic Review, July-August 1999 | Go to article overview

Fiscal Disparity among the States Revisited


Tannenwald, Robert, New England Economic Review


The 50 states differ sharply in the scope of public services their state and local governments must deliver and in the costs of providing them. The governments of many states, through no fault of their own, must work relatively hard to provide the services needed by those who reside, work, travel, and vacation within their borders. For example, some have a high proportion of low-income residents, who need cash assistance, special education, and extensive health care. Others have a high concentration of school-age children, who need primary and secondary education. Such states have high fiscal need, that is, they face conditions that increase the cost of delivering state and local services or augment the scope of services they must provide.

The states also differ dramatically in fiscal capacity, that is, the capacity of their state and local governments to raise revenues. As discussed later in this article, the measurement of fiscal capacity has proved more controversial than that of fiscal need. Nevertheless, policy analysts agree that in order to evaluate a state's degree of fiscal comfort properly, one must take into account capacity relative to need.

Interjurisdictional differences in fiscal comfort are often referred to as fiscal disparity. The degree of fiscal disparity among the states has been a salient issue throughout our nation's history. Since World War II, federal policymakers have implemented a number of aid programs designed to mitigate interstate fiscal disparity. Consequently, policy analysts have expended considerable effort trying to measure its severity and to identify states suffering the most fiscal stress. In recent years, the degree of fiscal disparity has been a focal point of the "devolution" debate. While some policymakers have argued that many fiscal responsibilities, currently federal, should be "devolved" to the states, others worry that some states lack the ability to expand their fiscal domain. They are also concerned that those states least able to assume abandoned federal programs would be at a disadvantage in interstate competition, forcing them into a vicious circle of reduced public services, loss of labor and capital, intensification of their fiscal problems, and further spending cuts or tax increases. Thus, the levelness of the interstate "playing field" remains a key empirical issue in U.S. intergovernmental fiscal relations.

In a previous article in this Review (Tannenwald 1998), the author evaluated interstate differences in fiscal capacity, fiscal need, and fiscal comfort in state fiscal year 1994 (FY1994). The study used methods developed by the U.S. Advisory Commission on Intergovernmental Relations (ACIR), a defunct agency that last performed such an analysis for FY1991. The article did not critique these methods, attempt to improve upon them, or compare them with alternatives.

Stepping back from the statistical detail of the previous piece, this article begins with a discussion of the principal issues confronting analysts in the evaluation of fiscal capacity. Using this framework, subsequent sections compare and contrast alternative methods for evaluating fiscal capacity. The article uses a modified version of ACIR's methodologies to update state-by-state estimates of fiscal capacity, fiscal need, and fiscal comfort to FY1996. The concluding section highlights key findings and draws implications for New England.

I. Salient Issues in the Measurement of State Fiscal Capacity

Many conceptual and empirical issues divide analysts of fiscal capacity. Only the most significant are briefly discussed here. Extensive analyses of these and other relevant controversies can be found in Barro (1986a, 1986b), Gold (1986), Akin (1973), Fastrup (1986), Sawicky (1986), and Compson and Navratil (1997).

Fiscal Capacity and the State Budget Constraint

As Barro (1986b) notes, definitions of fiscal capacity tend to be tautological and imprecise, such as the "financing capability of governments" (U. …

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