Are State Governments Prepared for Fiscal Crises? A Look at Revenue Diversification during the 1990s

Abstract

The financial condition of state and local governments has long been held as a prominent topic of discussion among government administrators, public economists, and political scholars. This article addresses the competing hypotheses of revenue diversification and revenue complexity and offers an empirical analysis of the various factors that affect state tax revenue diversification. The findings suggest that although political and demographic factors influence the level of state tax revenue diversification, economic factors and whether a state utilizes an income or sales tax to generate revenue represent the greatest determinants of state tax structures. As a result, this article serves as a foundation to initiate the development of a comprehensive theory of the determinants of state tax structures.

Examining Small Town Revenues: To What Extent Are They Diversified?

“…First, based on previously established measures of revenue diversification, town governments are significantly less diversified than state and municipal governments. The two state‐level studies (Carroll 2005; Suyderhoud 1994) reported rather high levels of diversification, with mean HHI scores of 0.85 and 0.81. However, our replication of the HHI formulas and time periods used by these authors yielded mean HHI scores for towns ranging between 0.23 and 0.44 using the Suyderhoud (1994) approach and between 0.02 and 0.12 using the Carroll (2005) approach.…”

“…As a result, Suyderhoud (1994) offered a more comprehensive and quantifiable definition incorporating four revenue categories—property taxes, individual and corporate income taxes, general sales taxes, and all other revenues, including nontax revenues—into a single measure of diversification based on the Hirshman‐Herfindahl Index (HHI) 1 . This contribution motivated subsequent empirical examinations of diversification among states and municipalities (Carroll 2005; Carroll, Eger, and Marlowe 2003; Hendrick 2002; Suyderhoud 1994). These studies provide perhaps the most consistent definitions and quantitative examinations of revenue diversification among state and local governments by using the HHI approach to measure diversification.…”

“…Using the approach of Carroll, Eger, and Marlowe (2003), the data reported in row three pertain to the 1996–2000 time period and also calculated HHI using the revenue categories of property tax, general sales tax, other tax, and other nontax revenue 12 . The data in the last row of table 2 replicate Carroll's (2005) approach; diversification was calculated using data for each year from 1990 to 2000 and the following revenue categories for the HHI formula: property tax, personal and corporate income tax, general sales tax, motor fuel tax, and other tax 13…”

Assessing the influence of socioeconomic drivers on Italian municipal financial destabilization

“…Later studies seem to downsize the role of socioeconomic factors (Clark, 1999;Dougherty et al, 2000), claiming that they were relevant only when higher levels of government were unable to respond to economic recession (Falconer, 1991). More recent studies seem to provide further evidence about the relevance of socioeconomic downturns in producing local fiscal stress, as socioeconomic factors can substantially influence the revenue-generating capacity of local governments (Honadle, 2003;Edgerton et al, 2004;Beckett-Camarata, 2004;Watson et al, 2005;Carroll, 2005;Jones and Walker, 2007;Skidmore and Scorsone, 2011). Yet, according to some authors and with specific reference to US municipal bankruptcy, political factors appear to shape, influence, or even determine whether or not a government will file for bankruptcy protection, and are therefore more important than economic factors (Park, 2004).…”

Local Government Budget Stabilization

“…HHI was first proposed by Suyderhoud (1994). Following the work of Suyderhoud (1994) and Carroll (2005), Carroll and Johnson (2010) noted there are substantial differences in HHI that reflect differences in revenue structure and level of government.…”