Interstate Fiscal Disparity, in 1997
Tannenwald, Robert, New England Economic Review
Readily available tax statistics tell state and local policymakers the amount and mix of revenues that their governments receive. However, these officials pose harder fiscal questions than simply how much money is flowing into their coffers and from what sources. They frequently ask, What is our state's capacity to raise revenues, regardless of how much we actually collect? To what extent do we utilize that capacity? Is our revenue capacity sufficient to finance our state's need for public services? These questions are especially salient today, given that during state fiscal year 2002 (FY2002) revenues in most states fell far short of their targeted levels.
Questions surrounding the issue of fiscal adequacy are difficult to answer definitively. In previous articles appearing in this Review (Tannenwald 1998, 1999), we evaluated interstate differences in fiscal capacity and fiscal need for FY1994 and FY1996. Prior to these efforts, the U.S. Advisory Commission on Intergovernmental Relations (ACIR) developed indicators providing such interstate comparisons for several (but not all) years from FY1962 through FY1991. This article presents such comparisons for FY1997.
I. Key Concepts
As noted in Tannenwald (1999), the 50 states differ widely in the fiscal pressures that they confront. While all states must provide services to residents, workers, travelers, and tourists, some must work harder than others to perform these functions. For example, some states have a high proportion of residents below or near the poverty line who need cash assistance, special education, and extensive health care. Others have a high concentration of children between the ages of 5 and 18 who need schooling. Such states have high fiscal need, that is, they face conditions that increase the cost of delivering services or augment the scope of services that they must provide.
The states also differ dramatically in their capacity to raise revenues, referred to as their fiscal capacity. The term tax effort refers to the proportion of tax capacity actually utilized--the ratio of revenues collected to tax capacity. In order to evaluate a state's degree of fiscal comfort properly, one must take into account capacity relative to need.
Differences across jurisdictions in fiscal comfort reflect fiscal disparity. The degree of fiscal disparity among subnational jurisdictions has been a troubling issue in many nations, including the United States and Canada. Since World War II, federal policymakers in both nations have implemented a number of aid programs designed to mitigate interstate and interprovincial fiscal disparity. In order to evaluate the effectiveness of their efforts, policy analysts have tried to estimate the extent of fiscal disparity in both countries and identify those states and provinces exhibiting the most severe degree of fiscal stress.
In recent years, the degree of fiscal disparity has been an important element of the "devolution" debate. While some policymakers have argued that many fiscal responsibilities that are currently in the federal realm should be "devolved" to the states and provinces, others worry that some states and provinces lack the ability to expand their fiscal domain. They are also concerned that those states and provinces 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 and interprovincial "playing field" remains a key empirical issue in U.S. and Canadian intergovernmental fiscal relations.
II. Fiscal Capacity
As in our earlier articles, we use a modified version of methodologies developed by ACIR, an organization that no longer exists, to compare the states in terms of fiscal capacity and fiscal need. …